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Navigating Information with a Tax Documents Checklist

Navigating Information with a Tax Documents Checklist

As tax season gets closer, providing a tax documents checklist to your clients is extraordinarily helpful. Helping them gather the appropriate information before you begin preparing tax returns saves a good deal of time in the long run, building rapport with your customer base and easing your own workload.

Individuals should gather the following tax forms and documents when preparing to meet with their tax preparers:

  • Forms W-2
  • Various Forms 1099
  • Various Forms 1098
  • Tax-deductible expense forms
  • Healthcare forms
  • Identifying information

Let’s look at these documents in more detail to provide context for both you and your clients.

Forms W-2

Form W-2, Wage and Tax Statement, is a crucial document provided by employers to their employees.

This form summarizes an individual's annual earnings and the amount of taxes withheld throughout the tax year. It includes key information such as wages, tips, and other forms of compensation received by the employee. Additionally, the W-2 details various tax-related data, including federal, state, and local income tax withholdings, as well as contributions to Social Security and Medicare.

Employees should receive a W-2 from each employer they worked for during the tax year, and this form serves as a vital component in accurately reporting income and fulfilling tax obligations when filing a tax return. It is essential for individuals to carefully review their W-2 for accuracy and provide it to their tax preparer for proper completion of their tax filing.

When you're preparing a tax return, you will use the information from your client’s W-2 to report income and taxes withheld. Here's where you typically enter the information from a W-2:

  • Income section (Form 1040, line 1): The total wages reported on the W-2 should be entered on line 1 of Form 1040, which is the line for "Wages, salaries, tips, etc."
  • Withholding section (Form 1040, lines 16-19): The federal income tax withheld, Social Security tax withheld, and Medicare tax withheld from a W-2 should be reported on the respective lines:
    • Line 16: Enter the total federal income tax withheld (box 2 on the W-2).
    • Line 19: Combine the Social Security tax withheld (box 4 on theW-2) and the Medicare tax withheld (box 6 on theW-2) and enter the total.

Forms 1099

Several different tax forms begin with the number “1099” and are used to report various types of income other than wages, salaries, and tips. These forms are typically issued by payers to individuals or entities that have received certain types of income.

Here are some common Forms 1099 and what they report:

  • 1099-INT (Interest Income): This form reports interest income earned from banks, credit unions, or other financial institutions. It includes both taxable and tax-exempt interest.
  • 1099-DIV (Dividend Income): This form reports dividends and other distributions from investments in stocks, mutual funds, or other securities.
  • 1099-MISC (Miscellaneous Income): Historically, this form was used to report various types of income, including nonemployee compensation, rent, prizes, awards, and other miscellaneous income. However, starting in tax year 2020, nonemployee compensation has its own form, the 1099-NEC.
  • 1099-NEC (Nonemployee Compensation): This form specifically reports income earned by nonemployees, such as independent contractors, freelancers, and self-employed individuals.
  • 1099-B (Brokerage Transactions): This form reports proceeds from the sale of stocks, bonds, or other securities. It includes information about capital gains and losses.
  • 1099-S (Proceeds from Real Estate Transactions): This form reports the sale or exchange of real estate, providing details about the proceeds from the transaction.
  • 1099-G (Certain Government Payments): This form reports government payments such as unemployment compensation, state and local tax refunds, and other government payments.
  • 1099-R (Distributions from Retirement Plans): This form reports distributions from pensions, annuities, retirement plans, and other similar accounts.

The placement of information from various Forms 1099 on a tax return can vary based on the type of income being reported. Here's a general guide on where to report common types of income from Forms 1099:

  • 1099-INT (Interest Income):
    • Report the interest income on Schedule B (Form 1040), Part I, if the total interest income exceeds $1,500.
    • If the interest income is $1,500 or less and you don't have to file Schedule B, you can report it directly on Form 1040, line 2b.
  • 1099-DIV (Dividend Income):
    • Report dividend income on Schedule B (Form 1040), Part II.
    • Transfer the total qualified dividends to Form 1040, line 3a, and the total ordinary dividends to line 3b.
  • 1099-MISC (Miscellaneous Income):
    • For income previously reported in box 7, “Nonemployee Compensation,” use the newer 1099-NEC form. Report this income on Schedule C (Form 1040) if your client is self-employed, or on Schedule E (Form 1040) if the income is from rental properties or other sources.
    • For other income reported on the 1099-MISC (e.g., rent, royalties, prizes, awards), report it on the appropriate schedule (Schedule E, Schedule C, etc.).
  • 1099-NEC (Nonemployee Compensation):
    • Report nonemployee compensation on Schedule C (Form 1040) if your client is self-employed, or on Schedule E (Form 1040) if the income is from rental properties or other sources.
  • 1099-B (Brokerage Transactions):
    • Report the information on Schedule D (Form 1040) to calculate capital gains and losses.
    • Transfer the totals to Form 1040, Schedule 1, line 6.
  • 1099-S (Proceeds from Real Estate Transactions):
    • Report the information on Form 8949 and Schedule D (Form 1040) if your client sold real estate.
    • Transfer the totals to Form 1040, Schedule 1, line 6.
  • 1099-G (Certain Government Payments):
    • Report unemployment compensation on Form 1040, line 7.
    • Report state and local tax refunds on Form 1040, line 1.
  • 1099-R (Distributions from Retirement Plans):
    • Report distributions on Form 1040, line 4a (taxable amount) and line 4b (total distribution).

1098 Forms

Form 1098 is used to report certain types of payments and transactions for tax purposes. Here are the common 1098 forms and what they typically report:

  • 1098-Mortgage Interest (1098-M):
    • This form is provided by mortgage lenders and reports the amount of mortgage interest paid by the taxpayer during the tax year. It also includes information about any points paid on the mortgage.
    • The information from this form is used to claim deductions for mortgage interest on Schedule A (Itemized Deductions) of Form 1040.
  • 1098-Student Loan Interest (1098-E):
    • This form is provided by student loan servicers and reports the amount of interest paid on qualified student loans during the tax year.
    • The information from this form is used to claim deductions for student loan interest on Form 1040, line 20.
  • 1098-Tuition Statement (1098-T):
    • This form is provided by educational institutions and reports certain payments made for qualified tuition and related expenses. It includes information about amounts billed and amounts received for qualified tuition and related expenses.
    • The information from this form is often used to claim education-related tax credits, such as the American Opportunity Credit or the Lifetime Learning Credit. However, it's important to note that starting in tax year 2018, the IRS implemented changes to the 1098-T reporting requirements.

Records of Tax-Deductible Expenses

Tax-deductible expenses are certain costs that individuals and businesses can subtract from their total income, thereby reducing the amount of income subject to taxation. Deductible expenses are typically specified and regulated by tax laws, and they vary based on factors such as individual circumstances, business activities, and the latest version of the federal and state tax code.

Here are some common examples of tax-deductible expenses for individuals and businesses.

  • Individuals:
    • Mortgage Interest: Interest paid on a mortgage for a qualified home may be deductible.
    • State and Local Taxes (SALT): Depending on tax laws, individuals may be able to deduct state and local income taxes or sales taxes.
    • Medical Expenses: Certain unreimbursed medical expenses that exceed a specified percentage of your client’s adjusted gross income may be deductible.
    • Charitable Contributions: Donations to qualified charitable organizations are often tax-deductible.
    • Student Loan Interest: Interest paid on qualified student loans may be deductible up to a certain limit.
    • Job-Related Expenses: Unreimbursed expenses related to your client’s job, such as job-related education or work-related travel, may be deductible.
  • For Businesses:
    • Business Expenses: Ordinary and necessary expenses incurred in the operation of a business are generally deductible. This includes costs such as rent, utilities, and office supplies.
    • Employee Salaries and Benefits: Wages, salaries, and certain employee benefits are typically deductible for businesses.
    • Depreciation: Businesses can often deduct the cost of certain assets over time through depreciation.
    • Home Office Expenses: If your client uses part of their home for business purposes, you may be able to deduct their related expenses.
    • Business Travel and Meals: Costs associated with business travel and meals may be deductible, but there are specific rules and limitations.
    • Professional Fees: Fees paid to professionals such as accountants or attorneys for business-related services may be deductible.

The reporting of tax-deductible expenses depends on the nature of the expense and the tax form you are using. Individuals will report tax-deductible expenses on their Forms 1040, and businesses will use either Schedule C, which is added to a Form 1040 for sole proprietors who own and operate the business, or Form 1120, which is used by corporations.

Health Insurance Information

If you have a client who obtained health insurance through Healthcare.gov or a state-based health insurance marketplace, you will need to report certain information on their tax return. Here are the key elements you should be aware of:

Form 1095-A, 1095-B, or 1095-C:

  • Form 1095-A (Health Insurance Marketplace Statement):
    • If your client purchased health insurance through the Health Insurance Marketplace, they will receive Form 1095-A.
    • This form reports the premium amounts paid, the premium tax credit (if applicable), and other information needed to reconcile any advance premium tax credits your client received.
  • Form 1095-B (Health Coverage):
    • If your client had coverage through Medicaid, the Children's Health Insurance Program (CHIP), or certain other health insurance providers, they may receive Form 1095-B.
    • This form provides information about the months your client was covered, and you may use it to confirm that they had minimum essential coverage.
  • Form 1095-C (Employer-Provided Health Insurance Offer and Coverage):
    • If your client was covered by an employer-sponsored health plan, they may receive Form 1095-C from their employer.
    • This form provides information about the health insurance coverage offered by your client’s employer, including details about their enrollment.

Reporting on Form 1040:

  • Individual Shared Responsibility Payment (Individual Mandate):
    • The individual mandate, which required individuals to have health coverage or pay a penalty, was effectively eliminated after tax year 2018. There is no penalty for not having health insurance; however, it's essential to be aware of any state-specific requirements.
  • Premium Tax Credit (PTC):
    • If your client purchased health insurance through the Marketplace and received advance premium tax credits to help lower monthly premiums, you must reconcile these credits on their tax return.
    • Use Form 8962, Premium Tax Credit (PTC), to calculate the premium tax credit and reconcile any differences between the advance credit payments and the actual credit your client is eligible for based on income.

When filing a tax return, make sure to include the relevant information from Forms 1095-A, 1095-B, or 1095-C, and any other supporting documentation related to your client’s health insurance coverage.

Identifying Information

Finally, be sure to have access to important identifying information in order to complete and file your clients’ tax returns.

  • Social Security Number or Tax ID Number: Provide the correct Social Security Number or Tax ID Number, as well as those of any dependents your clients may be claiming.
  • Bank Account Information: If your client chooses direct deposit for their refund, you will need their bank account details.
  • Previous Year's Tax Return: A copy of a previous year's tax return can be helpful for reference, using AGI to prove identity when e-filing, and to ensure consistency in reporting.
  • Identity Protection Personal Identification Number (IP PIN): This six-digit number is assigned by the IRS to eligible individuals to help prevent the misuse of their Social Security Number (SSN) on federal income tax returns. Taxpayers can also opt for an IP PIN for an extra layer of security.

Having your clients gather their tax documents is a proactive and essential step in ensuring a smooth tax preparation process. It contributes to accuracy, compliance, and efficiency, ultimately helping you and your customers navigate the tax filing season with confidence and peace of mind. Organized and complete documentation is key to a successful tax filing experience, and we hope this in-depth overview helps support you and your practice in the upcoming season.

Drake Software Blog Team

The Drake Software Blog Team is proud to cover the latest in tax-industry-related news, from tax law and IRS updates to technology and business strategies. If you have questions about an article or just want to reach out to our staff, email comments@taxingsubjects.com.