tax forms investors receive: 1099-B, 1099-DIV, 1099-INT

In short

A friend of mine opened his mailbox one February and found six envelopes from three different firms, and he nearly sat down on the curb. If you hold a brokerage account, a savings account, or a mutual fund, you will likely get a few of these forms too. Three of them matter most. Form 1099-INT reports interest, Form 1099-DIV reports dividends, and Form 1099-B reports sales of investments. Each one is also sent to the IRS, so the numbers on your tax return should match them. Keep them together, check them against your own records, and bring them to whoever prepares your return. Nothing here is hard. It just looks that way at first.

The whole of it

What it is

I once watched a neighbor stare at a 1099 as if it were a bill. It is not a bill. It is a report card for money your accounts earned or moved during the year. A bank, a broker, or a fund company sends it so you can report that income. The IRS gets a copy as well.

Form 1099-INT reports interest. If you hold a savings account, a certificate of deposit, or a bond, the payer may send this form. Form 1099-DIV reports dividends, which are shares of profit that a company or fund pays out to its owners. It also reports capital gain distributions, which are gains a fund passes along to its shareholders. Form 1099-B reports sales. When you sell a stock, a bond, or a fund share, the broker reports the proceeds, and often the cost basis too. Cost basis is simply what you paid for the shares, with certain adjustments.

Many brokers bundle all of these into one long document, often called a consolidated 1099. You may see the three forms as separate pages inside a single file. That is normal.

How it works

If you are holding investments in a regular taxable account, the forms follow a simple path. The payer collects the year's numbers. Then it sends you a copy and sends the IRS a copy. You report the same amounts on your return.

Interest from Form 1099-INT is generally taxed as ordinary income. Dividends on Form 1099-DIV come in two flavors. Ordinary dividends are taxed like wages. Qualified dividends may be taxed at lower long term rates if you meet the holding period rules. The form shows both amounts in separate boxes, so you can see the split.

Form 1099-B works a little differently. It shows what you got when you sold. Your gain or loss is the sale price minus your cost basis. If you held the shares one year or less, the gain is short term, and it is taxed like ordinary income. If you held them longer than one year, the gain is long term, and it usually gets lower rates. The form tells you which bucket each sale falls into, and the IRS uses Form 8949 and Schedule D to total it all up.

Timing trips people up. Payers must send most of these forms by a date in late January or early February. Brokers often send their consolidated forms later, sometimes in mid February or even March, because they wait for final figures from the funds. Corrected forms do happen. If you file early and a corrected form arrives afterward, the filer may need to amend the return.

Accounts like a 401(k), a traditional IRA, or a Roth IRA work differently. Growth inside those accounts is generally not reported on these forms each year. The tax rules apply when money comes out, and that is reported on Form 1099-R instead.

The numbers, and where to find yours

I have never met anyone who loved hunting for a number in a stack of paper. So here is where to look. On Form 1099-INT, interest income sits in Box 1. On Form 1099-DIV, total ordinary dividends are in Box 1a, and the qualified part is in Box 1b. Total capital gain distributions are in Box 2a. On Form 1099-B, look for the proceeds, the cost basis, the dates, and whether the gain is short term or long term.

Some rules are set by law and change from year to year. The threshold at which a payer must send you a 1099-INT is the current figure, which the official source publishes each year. The long term capital gains rate brackets depend on your income, and the current breakpoints are the current figure, which the official source publishes each year. The point where the extra tax on investment income applies is the current figure, which the official source publishes each year. Please check the official figures when you file. The IRS publishes the instructions for each form by name, such as the Instructions for Forms 1099-INT and 1099-OID, and the Instructions for Form 1099-DIV. Publication 550, Investment Income and Expenses, explains how all of this is taxed.

A worked example

Let me tell you about a woman named Maria. She is 41, earns $52,000 a year as a dental office manager, and keeps a small taxable brokerage account.

In February she gets one consolidated 1099 from her broker. The interest page shows $85 from her cash balance. The dividend page shows $640 in total ordinary dividends, and $520 of that is qualified. The sales page shows she sold shares of one fund in October.

She had bought those shares for $3,000 in March of the prior year. She sold them for $3,900. That is more than one year, so the gain is long term. The gain is $3,900 minus $3,000, which is $900.

Now she adds up what is taxed as ordinary income. Interest of $85 plus the nonqualified dividends of $640 minus $520, which is $120, makes $205. The $520 of qualified dividends and the $900 long term gain get the lower long term rates. Her total investment income for the year is $85 plus $640 plus $900, which is $1,625.

Say her tax rate on ordinary income is 12 percent and her long term rate is 0 percent at her income level. Her tax on the ordinary piece would be $205 times 0.12, which is $24.60. Her long term pieces would add $0. Her rates may differ, since they depend on her whole return. The point is not the exact tax. The point is that she can trace every dollar back to a box on a form.

Where it goes wrong

I have made this mistake myself, so I say it kindly. The most common slip is assuming that no form means no tax. A payer may skip the form when the amount is small. The income is still reportable. Another slip is trusting the cost basis box blindly. Brokers must report basis for many shares bought in recent years, but older shares, shares moved between firms, and gifted shares can show a blank or a wrong basis. If the basis is missing, the IRS may treat the gain as larger than it was. Check your own purchase records.

Reinvested dividends cause quiet trouble. When a fund buys more shares with your dividend, you still owe tax on that dividend. The reinvested amount also raises your basis. Forget that, and you pay tax twice on the same money. Wash sales are another trap. If a seller takes a loss and buys the same investment within thirty days before or after the sale, the loss may be disallowed for now. The broker's form may show an adjustment, but it often cannot see trades in your other accounts.

Last, watch for corrected forms. They carry a mark at the top. If one arrives after you file, the return may need an amendment. Keep every version.

Questions to answer before you leave this page

Have you gathered every 1099 from every bank, broker, and fund company that holds your money? Did you check each one against your own records for the year? Do you know which sales on Form 1099-B were short term and which were long term? Is the cost basis filled in for each sale, and does it match what you actually paid? Did you count the dividends you reinvested as income, and add them to your basis? Are there accounts in which you earned small amounts of interest that never produced a form? Have you looked at the IRS instructions for each form by name, or at Publication 550, to confirm the current rules? And if a corrected form shows up next month, do you know where you will keep it?