The 1099 is a tax form issued by your brokerage firm to help you report your taxable investment
income when filing your taxes with the IRS. Brokerages are required by the IRS
to send out 1099 forms by February 15. However, most firms will try to send 1099s out sooner.
In this video, we'll walk through some of the main sections of the 1099 and what they mean. This is
just an overview, so remember to speak with a tax professional for issues specific to your account.
Let's look at the form itself. At the top of your 1099, you'll see general information that includes
names and addresses. Note the Document ID, which you'll enter if you use tax preparation software.
Next is the Summary Information, which consolidates information from throughout
the 1099 form. Each section is detailed later in the report. Let's look at each.
The Dividends and Distributions, or 1099-DIV,
section documents payments you may have received as a shareholder of some investments.
There are two types of dividends listed: ordinary and qualified. Ordinary dividends are taxable
while qualified dividends meet specific criteria to be taxed at the lower long-term capital gains
rate rather than at a higher tax rate for an individual's ordinary income.
The 1099-DIV can also include nondividend distributions,
more commonly called return of capital payments. These are the return of an
initial investment that isn't considered income or a gain. These distributions occur if you hold
pooled investments like mutual funds or Real Estate Investment Trusts, also known as REITs.
Note that holding pooled investments may affect when you receive your 1099,
pushing it closer to the February 15 deadline. This leaves time for the security issuer
to determine how distributions will be classified for the year.
The reclassification of these distributions is often the reason your 1099 form may differ from
your December statement. If a distribution does occur after you received your 1099,
you'll be issued a corrected 1099 and may have to amend your tax submission.
You may also get a corrected 1099 if the issuer reallocates the original dividend or distribution.
If you look at the Detail for Dividends and Distributions, which lists all your transactions,
the corrected 1099 will have the 03 code to designate the reclassification.
The Miscellaneous Income, or 1099-MISC, section includes income such as royalty payments,
substitute payments in lieu of dividends if you lent shares, or offers and promotions.
For example, some brokers may offer a promotion where they give cash if a new client opens an
account. If line 3 is greater than or equal to $600, then it must be reported to the IRS.
Section 1256 Contracts is a summary of profits and losses on what are called 1256 contracts.
This mainly includes broad-based index options. It's important to note that open contracts that
are held at the end of the year are treated as if they were closed. The value is assessed at fair
market on the last business day of the year. The Summary of Proceeds, Gains & Losses,
Adjustments and Withholdings is an overview of the 1099-B and summarizes your transactions.
Note this summary is not reported to the IRS. It's broken down by short term, long term,
and undetermined term. An undetermined-term trade shows proceeds from transactions for
which the holding period is unknown. You may need to contact a licensed tax
advisor when determining the purchase dates or holding periods of undetermined transactions.
This summary also lists your proceeds from trades, cost basis, net gains and losses,
and adjustments. An important adjustment is the wash sale. A wash sale occurs when a position
is closed at a loss and then reopened, or a similar position is opened, within 30 days.
Note that the loss on these trades can't be used for tax-loss harvesting.
The actual 1099-B form, called Proceeds from Broker and Barter Exchange Transactions,
helps you track your capital gains and losses and shows what's reported to the IRS. Capital
gains are profits made from buying and selling your investments. Gains are usually taxable,
but some capital losses can often be deducted from the taxes owed on your gains.
This is known as tax-loss harvesting and can reduce your tax burden.
The 1099-B starts with Short Term Transactions for Covered Tax Lots.
This section is important for active short-term traders. Here you can view proceeds, cost basis,
gains, losses, and wash sales for short-term stock and options trades. Note that the cost
basis of the transactions for covered tax lots are reported to the IRS by the brokerage firm,
while the cost basis of the transactions for noncovered tax lots are not reported
to the IRS. The rest of the 1099-B contains long-term and undetermined transactions.
The next part of the summary is the Interest Income, or 1099-INT, section. It provides income
tracking for fixed-income investments like bonds, bills, and CDs. Not all bond income is taxable.
For example, municipal bond coupon payments are free from federal taxes
and may also be free from state taxes. The Original Issue Discount and Adjustment
section summarizes the 1099-OID and lists taxable interest that accrues
over the life of a debt instrument like a bond. Reconciliations, Fees, Expenses and Expenditures
are not reported to the IRS and are provided for your convenience when preparing your taxes.
It goes without saying, taxes for investing can be complicated.
But understanding the basics of your 1099 form can make it a little easier to prepare your taxes.
If you have more questions, talk with your tax professional.
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