Understanding Your 1099s

Tax season is frustrating for lots of people. Our system is incredibly complicated and, perhaps ironically, only gets more so when we’re doing what we’re supposed to be doing like working hard, saving, investing, and so forth. Still, we have to tally everything up once a year and pay our share to keep the lights on, or so they tell us.

According to a 2021 survey by the IRS more than half of American taxpayers use a paid preparer to file their returns. Most people I know have a “tax person” and this also seems true for most of my clients. Personally, I did my family’s taxes for years using TurboTax but shifted to using a CPA about ten years ago when I started this business. Coordinating business and personal tax, and doing it well and accurately, is hard and I’m happy to pay a professional to do it for me.

Other surveys indicate that maybe 60% of people would prefer to do their own taxes with good software and a simpler system, so there’s DIY interest out there. Various websites suggest doing your own taxes when they’re “simple” and paying someone when your details are “complicated” – how helpful is that when it’s all complicated? And just because we want to do something doesn’t mean that we can or should. I’m sure I could spend time doing my taxes but I just don’t want to. It’s easily worth it to pay someone to do the sausage making but I still try to understand all the numbers and strategy.

One example of the issues a potential DIYer has is the complexity of the data and documents they have to use to complete their return. There are lots of tax forms but let’s look at a couple of the most common in my industry, the 1099 Composite and 1099-R.

By the way, I don’t intend this post to be a super-detailed examination of each form. Instead, this is more of a shorthand way to look at them along with the sections and numbers I often look at as a financial planner.

Let’s consider the 1099 Composite:

As the name implies, this form includes an array of tax-related data such as dividends, interest, and gains and losses for taxable (not IRAs, Roth IRAs, or otherwise tax-deferred) accounts.

Schwab and other brokerage firms need time to review transactions made in their system and transactions and other data from investment providers like mutual fund companies. This data sometimes comes in late or gets revised after the tax year has closed. It’s for this reason that Schwab does two runs of these forms, the first in late January into early February and the second, for more complex accounts, in mid-February.

Assuming your accounts are at Schwab and also assuming they spent some time at TD Ameritrade last year, you’ll be getting two 1099 Composites for 2023, one from each company. The formats are different but the essential data is the same.

Delivery of these forms is usually electronic but you can have a paper copy mailed to you if that’s your preference.

Schwab’s 1099 Composite contains forms such as the 1099-DIV, the 1099-INT, and the 1099-B showing realized gains and losses. Those forms start the document after a couple of intro pages and then you’ll see summaries of each maybe midway through. These summaries aren’t reported to the IRS like the individual forms are. However, I like to look at the summaries first because they’re a little easier to follow.

For example, you can jump ahead to page 23 of 55 where summaries begin in the sample document below. But I often will jump ahead to page 31 (again, in this sample – yours may have fewer pages) to look at gains and losses first. I’ll review the totals to ensure accuracy and then work backwards to confirm the individual transactions look right.

https://si2.schwabinstitutional.com/SI2/Published/Direct/public/file/p-11092758

I’ll look for any large and/or unexpected numbers. Does anything appear to be missing? Maybe cost basis is missing? The information you see has been sent to the IRS so if anything is wrong you’ll need to have Schwab generate a new 1099 – you shouldn’t make corrections on your own. Otherwise, the 1099 Composite is a useful tool for assessing taxable activity for the year and that’s pretty much it. The document won’t give you rate of return information or investment analysis, but a clean form should give your tax preparer all they need.

Now let’s look at the 1099-R:

As with the Composite above, you’ll receive two 1099-R forms if you were taking distributions from your IRA while at TD Ameritrade and then at Schwab. Dividends, interest, gains, losses, and so forth aren’t normally reportable each year when they happen within a retirement account. All the IRS cares about is money leaving the account and why, so that’s what’s on the 1099-R.

That might sound simpler than the Composite, but it’s still challenging sometimes. Page 54 of 63 in the link below shows this form in detail.

I look at Box 1 for the year’s Gross Distribution amount, Boxes 4 and 14 for taxes withheld, and then Box 7 for the Distribution Code. This latter box can be problematic because sometimes the custodian codes a distribution incorrectly. These codes can have different tax ramifications so getting them right is key.

Code 7 is probably most common since it implies a “normal” distribution (meaning you’re old enough to draw without penalty and no other issues apply). All this is taxable as ordinary income.

Codes 1 and 2 are less common because they imply an early distribution that’s taxable as ordinary income plus a penalty, such as Code 1. Code 2 indicates there may be a penalty exception.

Also interesting is the box for “Taxable amount not determined”. This usually comes up when clients donated money to charity directly from their IRA. The gifted dollars aren’t taxable but Schwab doesn’t differentiate so they punt by checking that box. This leaves it up to the account owner to tell their tax advisor about the charitable gift but the box being checked typically flags the tax person to ask about it in case you’ve forgotten.

Other codes exist but review yours and let Schwab or your humble financial planner know if it seems wrong. Don’t manually correct it since the document needs to be reissued if there was a mistake.

Hopefully this helps you understand these tax forms a little better. I’m happy to help with further questions but specifics are probably best directed toward your tax advisor assuming you have one.

Here’s the guide I mentioned above.

https://advisorservices.schwab.com/resource/guide-to-schwab-tax-forms

Have questions? Ask us. We can help.