1099 Reporting: Explained so a Canadian could understand it.

I often get asked about 1099 reporting in emails and comments and most of it comes from Canadians looking to figure out what gets reporting on which IRS Form 1099 and why there are so many. 

Hopefully this will shed some light on the number of forms and what they report.  I think we all kow why they are in use, right?  When a business entity or individual receives any kind of income, the IRS usually wants to know about it.  Funny how that works, eh?

Besides who received the income, the IRS also wants to know the amount of income, the entity that made the payment, and the purpose.

I feel it is important to understand that there are also other types of IRS forms that are used to report income or payments, such as employee compensation which is generally reported on a Form W2.  

Below is a list of individual 1099 Forms for specific payment reporting; 
• 1099-A – Reports Acquisition or Abandonment of Secured Property
• 1099-B  – Reports Proceeds From Broker and Barter Exchange Transactions
• 1099-C  – Reports Cancellation of Debt
• 1099-CAP – Reports Changes in Corporate Control and Capital Structure
• 1099-DIV  – Reports Dividends and Distributions
• 1099-G  – Reports Certain Government Payments
• 1099-H  – Reports Health Coverage Tax Credit Advance Payments
• 1099-INT – Reports Interest Income
• 1099-LTC – Reports Long-Term Care and Accelerate Death Benefits
• 1099-MISC  – Reports Miscellaneous Income *
• 1099-OID – Reports Original Issue Discount
• 1099-PATR – Reports Taxable Distributions Received From Cooperatives
• 1099-Q  – Reports Payments From Qualified Education Programs
• 1099-R  – Reports Distributions From Pensions, Annuities, and Retirement
• 1099-S – Reports Proceeds From Real Estate Transactions
• 1099-SA – Reports Distributions From an HAS, or Medicare Advantage MSA

Second most popular questions: Is there a minimum reporting threshold?  Answer: The minimum dollar amount that must be reported varies depending on specific types of payments. 

*Many different types of payments are also reported on Form 1099-MISC.  The requirements for reporting payments on 1099-MISC can be complicated and the IRS Instructions for 1099-MISC IRS http://www.irs.gov/pub/irs-pdf/i1099msc.pdf should be consulted.

Third most popular questions: Who gets a copy?  Answer: When a 1099 is issued, one copy is retained by the payee for their records, one copy is send to the recipient of the payments, and a copy is sent to the IRS for reporting.
Is there an electronic filing requirement?  Any filers who have over 250 or more to report are required to file with the IRS electronically.

What is the deadline?  The reporting deadline to the IRS is February 28th, however, if the filer is reporting electronically, the deadline is March 31st.

In most cases the payment recipient should receive their copy of the 1099 by January 31st.

There are some exceptions to the recipient due date. Form 1099-B, 1099-S, and payments reported on 1099-MISC for proceeds paid by attorneys and certain payments reported by brokers have until February 15th for the payment recipient copy.

Individuals that receive payment as reported on a 1099 are generally required to report those payments on Form 1040 as income. Business entities may have to report payments as part of their income.

Hope this helped!

IRS Issues Final Regulations on New Basis Reporting Requirement; For Investors, Reporting Gains and Losses Gets Easier Starting in 2011

IR-2010-104, Oct. 12, 2010

WASHINGTON — The Internal Revenue Service today issued final regulations under a law change that will require reporting of basis and other information by stock brokers and mutual fund companies for most stock purchased in 2011 and all stock purchased in 2012 and later years. The reporting will be to investors and the IRS.

This additional reporting will be optional for stock purchased prior to these dates.

These regulations, posted today in the Federal Register, implement a provision in the Energy Improvement and Extension Act of 2008. Among other things, the regulations describe who is subject to this reporting requirement, which transactions are reportable and what information needs to be reported. Besides providing numerous examples, they also adopt a number of comments and suggestions received since the proposed regulations were issued last December.

Form 1099-B, Proceeds from Broker and Barter Exchange Transactions, long used to report sales prices, will be expanded in 2011 to include the cost or other basis of stock and mutual fund shares sold or exchanged during the year. Stock brokers and mutual fund companies will use this form to make these expanded year-end reports.

The expanded form will also be used to report whether gain or loss realized on these transactions is long-term (held more than one year) or short-term (held one year or less), a key factor affecting the tax treatment of gain or loss. The expanded form, to be first used for calendar-year 2011 sales, must be filed with the IRS and furnished to investors in early 2012.

The IRS today also announced penalty relief for brokers and custodians for reporting certain transfers of stock in 2011.

The relief is described in Notice 2010-67.

Mutual Funds Tax Considerations – IRS

So what exactly is a capital gain?

There can be two sources of capital gains for a mutual fund shareholder: 1) Gains from Sales: If you sell or exchange your mutual fund shares, you must pay tax on any gains arising from the sale, just as you would from a sale of individual securities. Shares that are held one year or less are considered short-term and are taxable at the shareholder’s income tax rate. Shares held for more than 12 months are considered long-term and taxable at a reduced rate.
Tax Reporting: Redemptions of mutual fund shares are reported to you on Form 1099-B. Remember that redemptions from municipal bond funds are taxable transactions.
Gains from Distributions – Capital gains realized by the fund on sales of its portfolio securities are “passed through” to shareholders as distributions. These amounts are reported to you by the fund on Form 1099-DIV. Short-term capital gains are included in Box 1a of Form 1099-DIV. Long-term capital gains are identified on Form 1099-DIV, Box 2a.

Now for some Q&A.

Q: Why would I have to pay tax on a capital gain distribution when my fund’s share price has decreased?
A: Capital gain distributions occur independently of price fluctuations in a fund. A mutual fund is required to distribute annual income and/or capital gains to its shareholders. At the same time, changes in financial markets can cause the price of fund shares to go up or down.

Q: Do I pay taxes on reinvested dividends like a DRIP program?
A: Yes, DRIP’s are taxed the same as cash distributions.

Q: How do I report international fund tax information on my tax return?
A: You may be entitled to take either a foreign tax credit or an itemized deduction for the amount of the foreign taxes paid, as reported in IRS Form 1099-DIV, box 6. It is usually more advantageous for you to take the foreign tax credit. To file for the allowable credit, you may be required to complete IRS Form 1116 and attach it to your IRS Form 1040. (Please refer to IRS Form 1040 instructions for exceptions from filing IRS Form 1116 to claim a tax credit.) If you are required to file Form 1116, please refer to the Source of Foreign Gross Income and Taxes Paid table

Use the Foreign Gross Income and Taxes Paid table only if you are required to complete IRS Form 1116 to claim a credit for foreign taxes paid. To compute the per-country gross income for Form 1116, apply the gross income percentage from the table to the amount in box 1a of your IRS Form 1099-DIV. To compute the per-country tax paid for Form 1116, apply the foreign taxes paid percentage to the amount shown in box 6 of your IRS Form 1099-DIV.

Q: I’ve redeemed shares from my account. What do I need to know about calculating my cost basis?
A: First, chose one of the four methods, keep these key points in mind:

You must state on your tax return the cost basis method you have selected.
When no method is stated, the IRS presumes you are using the First-In, First-Out (FIFO) method.
No matter which cost basis method you choose, you may not change to another method without permission from the IRS.
Reinvested dividends or capital gain distributions add to the cost basis of your shares. These dividends purchase shares. Your confirmation statements show you the number of shares purchased and the price of those shares.
Return of capital gain distributions reduces the cost basis of your shares. If the fund distributes a return of capital, it will report this amount to you in Box 3 of Form 1099-DIV at the end of the year.
The average cost methods are available only for mutual funds. They are not acceptable for sales of other investments, such as individual stocks and bonds. Different methods may be used for different funds. However, you must use the same method for the life of the fund.
Transfers of shares due to gifts or inheritance may require different basis calculations. In these situations, please consult your tax advisor before using this cost basis statement.
If you sell shares at a loss and purchased shares in the same fund within 30 days before or after the sale, the IRS considers it a “wash sale” transaction and the loss must be deferred for tax purposes. The rules for wash sales can be very complex. It is recommended that you consult a tax advisor if you suspect you are in this situation.