which tax forms to expect

It’s January – a new year, a new tax season. In just a few weeks, your mailbox and inbox will be filled with tax forms required by the IRS. But how do you know when you’re done collecting those tax forms? Let’s discuss what those tax forms are for, which ones you should expect, and which ones you’ll need to turn over to your tax preparer.

Income taxes

Income taxes are one of the primary sources of income the government uses to carry out its duties. In the United States, we have a progressive, pay-as-you-go tax system. This means that the tax rate is progressively higher on higher amounts of taxable income. Taxpayers are required to pay income taxes as they earn income throughout the year.

Your income tax return is your opportunity to inform the government (represented by the IRS) of all your income. This is also your opportunity to report any expenses and deductions the IRS permits you to subtract from that income and any credits for which you may be eligible. Additionally, this is where you record and receive credit for any payments you’ve already made. Combined, these items determine the actual amount of your tax liability for the year. In essence, your tax return allows you to “true-up” with the government and then either make an additional payment or request a refund. Don’t miss my next blog post, which delves into the tax forms relating to the most common income tax expenses and deductions.

The various tax forms you will receive report much of the information necessary to complete your personal tax return.

COMMON TAX FORMS AND WHAT TO EXPECT

Earned Income

EMPLOYEES, CONTRACTORS AND SELF-EMPLOYED

The money you earn from working for an employer will be reported on a W-2 form. Also reported on the W-2 are the federal income tax, the FICA, and Medicare amounts that were withheld from your paychecks, as well as your total wages and your taxable wages. If your employer withheld income taxes for a state, the state withholding will also be reported.

Also reported on the W-2 are items such as the amount paid for healthcare insurance, 401(k) contributions, and whether an employer retirement plan covers you. You will need to provide your tax preparer with a W-2 from each of your employers.

If you are self-employed, you may receive forms such as a 1099-NEC. This form is to report nonemployee compensation. You should expect one of these forms from anyone who paid you $600 or more for goods or services in 2023. You will also need to turn these forms over to your tax preparer.

BUSINESS OWNERS

While not a form you’ll receive in the mail, you will also need to give your tax preparer your books if you are a small business owner. They’ll start with your profit and loss statement and determine what income to report and what items can be deducted for tax purposes.

Passive and Portfolio Income

Here are some tax forms to expect (potentially) regarding your investment activity during the year.

EARNED INTEREST

The most common form is a 1099-INT. This form is used to report interest earned during the year. You may receive 1099-INT forms for accounts you’ve had for years, even if you did not receive those forms in the past. This is because we finally have significant interest rates again after having nearly 0% as an interest rate for years. If you earned at least $10 in interest from an institution, you should expect a 1099.

SALES OF INVESTMENTS

which tax forms investors should expectIf you had any sales, intentional or not, of securities during the year, you should expect a 1099-B. The 1099-B reports gains or losses from any barter or exchange transactions in the preceding year. The 1099-B will list each of the sales transactions, the proceeds from the transaction, the cost basis, and whether the holding period was long-term or short-term. Your tax preparer will use this information to determine your net long-term and short-term gains and losses. Transactions listed on a 1099-B include those sales or dispositions that occurred even if you did not initiate them. For instance, you may have shares that were automatically liquidated during a merger, acquisition, or spinoff. You’ll want to check your statements to learn whether you’ve had any of these transactions during the year. This can occur even if you did not initiate any trades.

If you held securities during the year that produced dividends, you should expect a 1099-DIV tax form. This form lists the holding that produced dividends, the dividend amount, and whether it was a qualified dividend. Qualified dividends are taxed at better rates than nonqualified or ordinary dividends.

Depending on the institution, you may receive all your 1099-B, 1099-INT, and 1099-DIV data on a single form called a Consolidated 1099. The Consolidated 1099 will have different sections for each reporting category.

INCOME FROM A PARTNERSHIP

If you are a partner or shareholder in a partnership, S Corporation, or some other financial entity with partners, or if you receive income distributions from an estate or trust, you can expect a Schedule K-1. The Schedule K-1 reports the amounts of gains, losses, deductions, credits, and distributable amounts for each participant. In addition, the K-1 is used to track the basis of each participant in the partnership.

Note: While most of the forms mentioned previously must be sent out to recipients by either January 31 or February 15, Schedule K-1 forms are not required to be issued until March 15.

INCOME FROM RETIREMENT ACCOUNTS

If you received a distribution from a retirement account or pension, you will receive a 1099-R. This includes distributions for rollovers or Roth conversions. It is important that you explain to your tax preparer the circumstances surrounding your 1099-R, including any amounts that should not be taxable. This is an area where we often see taxpayers pay taxes on non-taxable distributions because there was a gap in the information provided to the tax preparer.

OTHER TYPES OF 1099 FORMS

Other common types of 1099 forms you may receive include the 1099-S for the sale of real estate or a 1099-SA for distributions from an HSA account. If you received payments from the government for things like a local tax refund or unemployment benefits, you can expect to receive a 1099-G tax form. A 1099-MISC is issued for types of income that don’t fall under the other 1099 categories, such as prizes or awards.

KNOW WHAT TO EXPECT WITH INFINITY FINANCIAL STRATEGIES

When Infinity Financial Strategies manages your investment portfolio, we provide you with a detailed list of the tax forms that you should expect to receive. We provide this information in a document you can forward directly to your tax preparer.

 

This article is intended to be educational and thought-provoking rather than financial advice. When we work together in a financial planning engagement, we discuss your unique personal situation and your unique goals. We examine these factors and many others during our financial planning process to determine appropriate financial strategies for YOU.

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