The money you earn from your salary may not be your only source of income throughout the year, and it's important to report all of your income to the Internal Revenue Service on your tax return. That's why you'll need to keep track of any 1099 tax forms you get in the mail. A 1099 form is critical to your federal tax return, as it's a document that shows the various types of income you've earned in additional to your regular salary. Here are five key pieces of information you can glean from your 1099.
1. Freelance income
When you work for a company as a salaried or hourly employee, you'll receive a W-2 listing your earnings for the year. But if you do freelance work, whether full-time or on the side, you won't receive a W-2. Rather, you'll receive a 1099 tax form from each client you've done business with. Your 1099s can help you keep track of your freelance income so that you report it accurately on your tax return. Now keep in mind that a company is not required to submit a 1099 form if it paid you less than $600 over the course of the year. However, you're still obligated to report that income on your taxes.
2. Dividend income
If you hold dividend stocks in your portfolio and received dividend payments during the year, be on the lookout for a 1099 form, which should list your dividend income. You're required to report the dividend income you receive, so be sure to include that information when you go to file your taxes.
3. Interest income
If you have money in a savings account or certificate of deposit, you can expect your bank to send out a 1099 form listing the amount of interest income you received during the tax year in question. You'll need to not only report this income when you file your return, but pay taxes on it as well. In fact, you should pay particular attention to how much interest income you receive each year, because believe it or not, you don't actually want that number to be too high. Interest income is taxed as ordinary income, which means it's subject to the same tax rate as your salary or typical wages. Long-term capital gains and most dividends, by contrast, are taxed at a lower rate, so if you have extra money in a savings account that you're not planning to use in the next few years, it might pay to invest that cash in stocks instead.
4. Canceled debt
If you're carrying debt, your lender may wind up negotiating and reducing the amount you owe. But don't celebrate that debt cancellation too quickly, because there's a good chance you'll need to pay taxes on the portion that was forgiven or discharged. In other words, if you owed $2,000 and your lender was willing to forgive half that amount, generally speaking, you're required to pay taxes on the $1,000 portion that was canceled. Another function of the 1099 form is to list all canceled debts so that you know what to report for tax purposes, so don't forget to include this information on your next return.
5. Withdrawals from a retirement account
Unless you have a Roth IRA, the withdrawals you take from your retirement savings are taxed as ordinary income. Whenever you take money out of a retirement account, you'll receive a 1099 tax form showing your total withdrawals for the year. You can use this information to not only file an accurate return, but keep track of how much you're withdrawing from savings.
Remember, for every 1099 tax form you receive, the IRS gets a copy, too, so be sure to report all of your income when you file your upcoming return. Failing to do so could put you at risk for an IRS audit, and that's clearly not an ideal situation no matter how much money you've earned.