Not Every 1099 Raises Your Tax Bill

If you're a traditional employee, every year you receive a W-2 form from your employer that records your earnings for the year and the amount of taxes withheld from those earnings. IRS 1099 forms are complements to the W-2 form for non-traditional employee relationships. They are generally designed to record sources of income that have not been subjected to withholding – in other words, sources where an employer has not already paid the corresponding taxes.
If you are self-employed, you know the IRS form 1099-MISC that reports payments made to you over the course of the year. However, there are many different types of 1099 forms – and not all of them increase your tax bill.


SSA-1099 – Your Social Security benefits are recorded here. No more than 85% of your benefits can be subject to taxes, and that's only if your "combined income" as defined by the IRS reaches certain thresholds. Many Social Security recipients don't pay any tax on their benefits at all.
1099-R – This form covers distributions from retirement accounts such as IRAs and 401(k)s. Most are funded with pre-tax money and are therefore fully taxable, including the earnings. Roth IRA contributions are made with post-tax dollars and are not taxable, although earnings may be. Reportable death benefits paid due to the death of the insured life are also included on Form 1099-R.
1099-INT – Interest income that you receive (think savings or checking accounts) is recorded here. This income is fully taxable.
1099-DIV – Income from dividends and investment distributions from non-retirement accounts go here. This income is also taxable, although they may be taxed under the lower capital gains tax rate.
1099-Q – This form covers distributions from educational savings accounts (529 or Coverdell accounts). If you used the distribution for qualified educational expenses, the distribution is tax-free. If not, tax will be due on the earnings component of the distribution.
1099-G – The 1099-G covers government payments to individuals such as unemployment benefits, including benefits at all levels (federal, state, and local). Most government payments are taxable, but not all.
1099-C – Cancelled debt, such as forgiveness of mortgage debt, is considered a taxable benefit – just as if the creditor had paid you the amount of money to turn around and pay them back. 1099-C forms record this debt.
1099-LTC – 1099-LTC records benefits applied toward long-term care expenses. Assuming benefits are used for qualified LTC expenses, the benefits are tax-free – unless the policy pays a pre-set amount regardless of expenses. In that case, some portion of the benefit may be taxable.
1099-B – This form records the income from the sale of brokered assets such as stocks – but to determine the taxable profit or loss, you subtract the basis (in general, what you paid for the asset). If the result is a net loss for the year, your tax bill would be reduced.
1099-S – Income from real estate transactions are captured here. As with the 1099-B above, you will have to subtract the basis of your home to determine taxable profit or loss. You may also be able to exclude up to $250,000 in gains (twice that for couples filing jointly) under certain circumstances. A separate form (1099-A) captures foreclosures – and yes, you may have a taxable capital gain even in foreclosure.

Make sure that you understand how many 1099 forms you should expect to receive for the tax year, and follow-up with any entities that give an incorrect total (or fail to send a form at all). A mismatch between your records and IRS records could lead to an audit and headaches that go beyond an increase in your tax bill.

3 Ways to Weather the 2020 Tax Season

Over half of U.S. adults say financial stress negatively impacted their personal health and work performance in 2018, according to new research from Lincoln Financial Group. When it comes to tax season, preparation is key to easing anxiety, according to experts.


To weather the 2020 tax season:

Get the Information

Whether preparing your own tax return or paying a professional, good organization saves time and money. In addition to collecting the common tax documents (e.g., W-2s, 1099s and mortgage interest statements), you should gather receipts, evidence of contributions to charities and 529 plans, and basic information on assets sold during 2019.
Also consider milestones that impact taxes, such as marriage, divorce, birth of a child, adoption and sale of a home. Organizing this information is the first step toward ensuring timely filing.
The Tax Cuts and Jobs Act significantly increased the standard deduction for federal tax purposes. For the 2019 tax year, the standard deduction is $12,200 for individuals and $24,400 for married couples filing jointly. This higher deduction amount means many taxpayers won’t itemize deductions, thereby simplifying tax return preparation.

Be Proactive

Consider what actions you can take prior to the end of tax season to lessen its financial burden.
For example, if you qualify and act prior to April 15, you may deduct contributions to an IRA up to $6,000 ($7,000 if you’re over 50) on the 2019 income tax return. Maximum Simplified Employee Pension IRA contributions of $56,000 for 2019 can be made any time prior to the tax filing deadline, including extensions.
Or, if you participate in a high deductible health plan, you may be eligible to contribute to a health savings account with pre-tax dollars through April 15. For the 2019 tax year, the contribution limit is $3,500 if you’re single and $7,000 for families, with an additional $1,000 catch-up contribution for those 55 or older.

Use Technology

Embrace these technological advances to reduce tax preparation and filing burdens:
• Whether self-preparing or hiring a professional, tax information from documents filed with the IRS (W-2s, 1099s. etc.) can be downloaded directly into tax-prep software, so be sure to access electronic versions of these documents.
• Online banking makes it easy to manipulate account information and organize data about relevant expenses paid during the year, like estimated tax payments, medical and tuition payments and business expenses.  
• The IRS has offered the opportunity for electronic filing of tax returns for several years. Taxpayers who e-file typically receive acknowledgement that their returns have been filed and get their refunds faster than those who paper file.

From market volatility to managing debt, there are many causes of financial stress today. However, with some prudent strategies, you can greatly reduce your tax-related anxiety.

Tax filing tips to consider

Filing your taxes can be a complicated process, so it isn’t unusual for people to make mistakes, many of which can be costly if you don’t catch them in time. Here are a few of the ones we see frequently and that we urge our clients to careful about:

Calculation errors: The errors we see the most often, every year, are mathematical. Mistakes in arithmetic or in transferring amounts from one schedule to another will get you an immediate correction notice. Math mistakes can reduce your tax refund or result in you owing more than you thought, so be extra cautious with your numbers.

Additional income equals additional filing work: If you did any independent contracting in 2019, you probably received a Form 1099-MISC detailing the extra earnings. If you earned income from savings and investment accounts, you should have received Form 1099 INT and Form 1099 DIV statements. In each 1099 instance, the IRS knows precisely how much extra money you made, thanks to the copies of your 1099 forms they received from payers. So make sure you include all of your income on your tax return. If you forget, the IRS will send notices as well as impose penalties and interest.

Missing a tax break: Even though the IRS is quick to point out when you fail to report income, they are not as thoughtful when it comes to informing you of missed deductions or credits.  There are a number of tax credits and exemptions available to families and students of which you may want to take advantage. Tax credits such as the child or dependent care credit or those associated with education can substantially lower your tax bill. Don’t automatically take the standard deduction. Homeowners, in particular, should itemize their biggest deductions and see if they add up to more than the standard deduction amount.

Name changes: When the names of a taxpayer, his or her spouse, or their children don't match the tax identification number that the Social Security Administration has on record, the IRS may kick out or slow down the processing of the tax return. If there are name changes due to marriage or divorce, notify the IRS now so that the new name won't cause a problem when you file your tax return.

Direct deposit woes: Typically, the quickest way to receive a refund is to select the direct deposit option. Be sure to double check your bank account and routing numbers for direct deposited refunds or electronic tax payments. Entering incorrect information can result in a delayed refund or late payment penalties and interest.

Filing status mistakes: Marriage, divorce, or the birth of children can all affect your filing status. Make sure you know what each tax-filing status entails, and choose the one that best fits your personal tax situation.

Social Security number oversights: Since Social Security numbers are no longer printed on tax package labels due to privacy concerns, many people will forget to write theirs in where appropriate. Your tax ID number is crucial because there are so many transactions keyed to this number. Your social security number is also vital to claim several tax credits, such as the child tax and additional child tax credits, as well as ones for educational expenses and dependent care costs. 

Complete charitable contributions: If you give to charitable organizations be sure to include the donations on your return as they could be valuable deductions. Follow the donation tax rules, the most important being that you must give to a qualified organization (one that has tax-exempt status with the IRS) and have receipts and/or acknowledgments to support the donation.

Select the most advantageous filing status: If you are married don’t automatically choose the married filing joint option to file your return. In many cases you may save overall federal and state tax by selecting the married filing separate option. Calculate your total tax bill both ways and choose the option that results in the least amount of federal and state tax.  

Meeting the deadline: Don’t wait until the last minute, but if you do, make sure your mailed paper return is postmarked by the April filing deadline or that you hit "enter" to e-file your 1040 by midnight of the deadline day – April 15, 2020.

1099 WHAT? Different 1099s forms small business owners receive, explained

When you start a business, you end up dealing with a lot more paperwork.

When you were an employee, you had someone else at your company who would take care of all the paperwork and tax forms that need to be filed to stay in compliance with all the rules set forth by the federal and state governments.

Now you are responsible for all aspects of your business, which means you will need to complete the paperwork and deal with any correspondence that comes your way.

One type of form you will need to deal with start with “1099”. These would be referred to as series 1099 forms, and are used to report various types of income you would receive. Let’s take a look at a few of them that you may receive as a business owner.

1099-A: Acquisition or Abandonment of Secured Property –If you borrowed money from a bank or other lender to purchase property, and you either abandon or have the property foreclosed, you may have to treat the property as being sold. The lender will have to send you Form 1099-A with all the relevant information needed to report the “sale” on your return. If you had purchased an office for your business, and you abandon it or it gets foreclosed, you should expect this form from the lender.

1099-B: Proceeds from Broker and Barter Exchange Transactions – One way to save on cash is to barter with another business for services. If you did that, you would receive this form if you engaged in bartering with someone else, or took part in a bartering exchange.

1099-C: Cancellation of Debt – Here is something that may seem a little strange: If you borrow money, and the lender cancels the remaining debt at some time in the future, you have to recognize the amount forgiven as income. If you think about it, it does make sense. You actually gain from not having to pay back the money. If your loan is forgiven, you will get a 1099-C from the lender showing how much you of the forgiven loan you need to record as income.

1099-K: Merchant Card and Third Party Network Payments –Do you accept credit cards in your business. Then you will be receiving this form if you received money from any online sales you made during the year that were paid for with a credit card. You want to make sure the amounts on these forms match with your records. If not, contact the sender to determine what is causing the variance.

1099-MISC: Miscellaneous Income – This is the one on this list that you will probably most likely receive during the year, and possibly more than one if you have more than one customer. Basically, this form shows the amounts your customer has paid you for the work you did for them, or if you rent a property to them. You will want to review this form to make sure the amounts match your records.

1099-S: Proceeds from Real Estate Transactions – Although most of the time you won’t receive this form unless you sell your home, you may have a property that you own for your business. You would receive this form if you sell:

1. Land, whether improved or unimproved,
2. Residential, commercial, or industrial building
3. A condominium unit
4. A cooperative housing corporation’s stock

While most entrepreneurs do not have to deal with the sale of real estate, you should be aware of this form so that when your business grows to the point of needing a headquarters, you will be ready for the form when it arrives.

Having to deal with all these new forms may be intimidating, but don’t let that stop you from starting and growing a business. Additionally, don’t let the forms be so intimidating that you don’t ask an accountant what they are about and what should be done.

I always enjoy helping my clients understand their tax situation, and I would rather have you ask what something means than have you make a decision based on information about which you are confused. If you have questions, drop me a line and I would be happy to answer them.