Most taxpayers are used to seeing the term adjusted gross income, or AGI, when filing their tax returns. This is mostly due to the fact that your AGI dictates which tax credits and deductions you qualify for. While the term modified adjusted gross income, or MAGI, is not heard as often, it too plays a big role in determining eligibility for some tax credits and deductions. Here’s a breakdown of AGI and MAGI and how they affect your taxes.
What is AGI?
The IRS defines adjusted gross income (AGI) as gross income minus adjustments. To break this down even further, gross income is the sum of your wages, dividends, capital gains, business income, retirement distributions, interest earned, and other income. The IRS allows you to reduce this figure by subtracting certain allowable deductions including, but limited to:
Your AGI is important because it will determine your eligibility for several tax credits, such as:
The Child Tax Credit
The Earned Income Tax Credit
The American Opportunity Tax Credit
The adoption tax credit
The Lifetime Learning Credit
The Child and Dependent Care Credit
When it comes to tax deductions, your AGI will also play a major role. For example, the amount of cash contributions made to charity you can deduct is generally up to 60% of your AGI. In addition, you can deduct medical expenses that exceed 7.5% of your AGI. That said, your AGI, combined with the number of eligible deductions, will greatly determine if it’s best to itemize your deductions rather than taking the standard deduction.
What is MAGI?
Modified adjusted gross income (MAGI) is your adjusted gross income after adding back certain tax deductions. These deductions can include:
Some of these tax deductions can be uncommon so your MAGI may not differ from your AGI much.
How does MAGI affect my taxes?
Your MAGI may not be listed on your tax return like your AGI, but your MAGI does help determine your eligibility for some tax deductions. Most notably, it determines how much of your IRA contributions are deductible, if any and up to the $6,500 limit. The rules for how much you can deduct based on your MAGI are as follows:
Additionally, your MAGI may determine your eligibility for premium tax credits that help lower your health insurance costs and the amount of student loan interest you may deduct.
Tax Help from the Nation’s Leading Tax Resolution Firm
Taxes can get complicated, even more so when you owe the IRS. Figures like AGI and MAGI can play a big role in your tax savings, so understanding how they both work is critical. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
Today, Optima Tax Relief’s Lead Tax Attorney, Phil Hwang, discusses IRS notices, including when you can expect a notice to turn into enforcement and how to respond to a notice.
When does the IRS Levy?
Receiving an IRS notice can be very intimidating, especially when you are being notified of a tax balance due. But most people want to know exactly how many notices the IRS will send before they begin to take certain actions, such as levying your bank accounts, garnishing your wages, or placing a lien on your property. Unfortunately, there is not a set number that will trigger IRS enforcement as each case is different, but on average, a taxpayer might see about six notices come in the mail before the IRS begins to collect. A Final Notice of Intent to Levy will always be sent before the IRS takes action. The IRS will not and cannot take action without it.
IRS Final Notice of Intent to Levy
If you receive a Final Notice of Intent to Levy, you should act immediately. If you do not, the IRS can seize your property, bank accounts, wages, government benefits, and more. The most obvious way to resolve the issue is to pay your tax balance in full within the set amount of time the IRS provides. Although most people who find themselves in these situations typically do not have the funds to pay, doing something is better than ignoring the issue. Some other options you may have are:
Setting up an installment agreement with the IRS
Submitting an offer in compromise
Apply for Currently Not Collectible status
Apply for Innocent Spouse Relief
Request a Collection Due Process hearing if you disagree with the notice
Tune in next Friday for another episode of “Ask Phil” where Phil will break down IRS audits.
If You Received an IRS Notice, Contact Us Today for a Free Consultation
Form 1099 is more common than ever with many taxpayers turning to side hustles for extra income. Now that we have a good understanding of what types of 1099s there are and what they are used for, we can review some of the most frequently asked questions about them. Here are some of the most frequently asked questions about IRS Form 1099.
What if I mistakenly received a 1099?
If you received a 1099 by mistake, or if the amounts reported are incorrect, you should report the error to the payer immediately. If you’re lucky, they’ll be able to correct the error before sending a copy to the IRS. On the other hand, if they already have sent the 1099 to the IRS, you’ll need to request they send a corrected form. Spotting an error quickly will give you the best chance at avoiding further complications. That said, knowing which 1099s to expect in advance, and knowing the expected amount shown on them, can help you catch mistakes early on.
Do I need to report every 1099 I receive?
Every 1099 you receive should be considered in your tax return. This is because the IRS also receives a copy of each of your 1099s as well. For example, you must include all income earned through 1099-NEC, 1099-MISC, 1099-K, 1099-DIV, and others that report income. However, let’s say you receive 1099-S after the sale of your home. Remember, if the property was your primary residence for two of the five years before the sale, then up to $250,000 of the profit is exempt from taxes. This amount increases to $500,000 for married couples filing jointly. In this scenario, the transaction is not reportable. However, you will need to submit a written certification stating why you are exempt from capital gains on the transaction. Be sure to always consult with a knowledgeable tax professional about your reporting requirements.
What’s the difference between a 1099 and a W-2?
A 1099 form reports any income earned outside of regular employer income. It is commonly received by independent contractors, gig workers, and investors. A W-2 reports wages earned through an employer for the year. The biggest difference between the two forms is that the W-2 shows any taxes withheld from your wages, while the 1099 does not. That doesn’t mean you’re off the hook though. If you earn income through 1099s, you should be making estimated tax payments each quarter since the IRS requires taxes to be paid as income is earned. Failing to pay estimated taxes on 1099 income can result in penalties, interest and surprise tax bills.
What changes are coming for the 1099-K?
Previously, taxpayers only received a 1099-K, Payment Card and Third-Party Network Transactions, if they received over $20,000 in aggregate payments over 200 transactions through third-party payment networks, like Venmo or PayPal. For the 2024 tax year, the 1099-K reporting threshold was reduced down to just $5,000 in aggregate payments. Tax year 2025 will see this amount drop to $600. The IRS is expecting many more taxpayers to receive a 1099-K by the January 31st deadline, but with some hiccups along the way. For example, you may mistakenly receive a 1099-K for non-business transactions. Common scenarios may be collecting rent money from a roommate or receiving a friend’s portion of a dinner bill. In this case, it is up to you to contact the filer to request a corrected form.
What if I have more questions about 1099s?
We can’t stress enough just how complex 1099s can be. There are dozens of 1099 types and each with their own set of rules. Therefore, it’s best to consult a tax professional for insight on your own personal tax situation. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
Now that we know the basics of IRS Form 1099, we can take a closer look at the different types of 1099s you can receive. Remember, if you received any income outside your employer, you might receive a 1099. While most types of Form 1099 are not commonly received, there are a handful that you are likely to come across at some point. Here’s an overview of the different types of Form 1099.
1099-MISC: Miscellaneous Income
The 1099-MISC is an IRS form used to report $600 or more in miscellaneous income that you received during the tax year. Some examples of payments that require a 1099-MISC form include rent, prizes and awards, medical and health care payments, crop insurance proceeds, attorney payments, and more.
1099-NEC: Nonemployee Compensation
The 1099-NEC form is used to report non-employee compensation, including independent contractors, freelancers, sole proprietors, and self-employed individuals. If you received $600 or more in non-employee compensation during the tax year, you should receive a 1099-NEC. This form is used to report payments made for services rendered. These might include consulting fees, professional services, and other types of compensation.
1099-INT: Interest Income
Form 1099-INT is used to report any interest income you earned during the year. If you earned more than $10 in interest income, the financial institution is required to disburse a Form 1099-INT. The form will go both to you and the IRS. Interest income can include any earned from high-yield savings accounts, U.S. savings bonds, municipal bonds, and more.
1099-DIV: Dividends and Distributions
Form 1099-DIV is used to report dividends and distributions that are paid to you during the tax year, as well as any federal income tax withheld. This can include ordinary dividends, which are paid out of a company’s earnings and profits, qualified dividends, capital gain distributions, and non-dividend distributions. It does not include any dividends that you accrued through tax-sheltered retirement accounts. You will typically receive a 1099-INT if you received at least $10 in dividend income.
1099-K: Payment Card and Third-Party Network Transactions
Form 1099-K is meant to track payments made through third-party networks, such as PayPal or Venmo. For the 2023 tax year, you would receive a 1099-K if you earned at least $20,000 in 200 payments. 1099-Ks report gross income. Therefore, you should be sure to deduct any expenses you had to use third-party payment networks to receive payments.
Other Common Types of 1099
1099-B, Proceeds from Broker and Barter Exchange Transactions
This form reports the sale of stock, bonds, and other securities through a broker, as well as barter exchange transactions. These transactions must be reported even if you had a loss or broke even.
1099-G, Certain Government Payments
This reports payments you received from government agencies, including unemployment, tax refunds, taxable grants, and more.
1099-R, Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc.
This reports distributions from annuities, profit-sharing plans, retirement plans, IRAs, insurance contracts, or pensions. You should consult with a tax professional about whether you will owe tax on these distributions.
1099-S, Proceeds from Real Estate Transactions
1099-S reports the sale or exchange of real estate. If the property was your primary residence for two of the five years before the sale, then up to $250,000 of the profit is exempt from taxes. This amount increases to $500,000 for married couples filing jointly.
1099-SA, Distributions From an HSA, Archer MSA, or Medicare Advantage MSA
This form reports distributions made from a health savings account (HSA), Archer Medical Savings Account (Archer MSA), or a Medicare Advantage Medical Savings Account (MA MSA). Distributions can be taxable if they were used to pay for qualified medical expenses, if they were not rolled over in some cases, if excess contributions were made, and other scenarios. You should consult with a tax professional about whether you will owe tax on these distributions.
Less Common Types of 1099
1099-A, Acquisition or Abandonment of Secured Property
1099-A reports foreclosures on properties. You may be liable for capital gains tax and income tax for any unpaid foreclosed mortgage balances.
1099-C, Cancellation of Debt
This form reports discharged, forgiven, or canceled debt. This can include your property foreclosure or forgiven credit card debt but typically excludes debt discharged in bankruptcy. You will need to claim the amount reported on your 1099-C as taxable income.
1099-CAP, Changes in Corporate Control and Capital Structure
Form 1099-CAP reports the amount of cash, stock, or property received after a significant change in the company’s control or capital structure.
1099-H, Health Coverage Tax Credit (HCTC) Advance Payments
This reports any advance payments of qualified health insurance payments you received. If you qualify for trade adjustment assistance (TAA), alternative TAA (ATAA), reemployment TAA (RTAA), or Pension Benefit Guaranty Corporation (PBGC), you might see this form.
1099-LTC, Long Term Care and Accelerated Death Benefits
Form 1099-LTC reports payments made under a long-term care insurance contract. This includes accelerated death benefits, or benefits received before death because the policyholder has been deemed terminally ill by a doctor. The amount shown on the 1099-LTC are generally tax-free but are required to be reported to the IRS.
1099-LS, Reportable Life Insurance Sale
This form reports the amount paid to you from a life insurance sale.
1099-OID, Original Issue Discount
1099-OID reports $10 or more of income received when bonds, notes, or certificates of deposit (CDs) are sold at a discount from their maturity value.
1099-PATR, Taxable Distributions Received from Cooperatives
This reports at least $10 in patronage dividends and other distributions from a cooperative (co-op) in the prior year.
1099-Q, Payments from Qualified Education Programs
1099-Q reports total withdrawals from qualified tuition programs (QTPs) like 529 plans or Coverdell educational savings accounts. This amount may be taxable, depending on how the funds were used.
1099-QA, Distributions from ABLE Accounts
Form 1099-QA reports distributions from an Achieving a Better Life Experience (ABLE) Account for special needs individuals with a disability. These funds are not taxable if you used them to support a disabled individual.
1099-SB, Seller’s Investment in Life Insurance Contract
This reports the sale of a life insurance policy like the 1099-LS. The difference is that the original issuer of the policy files a 1099-SB after they receive the 1099-LS. You should consult with a tax professional if you receive either of these forms.
Tax Help for Those Who Receive 1099s
The types of Form 1099 and the accompanying filing requirements can quickly become very complicated. You should always consult with a tax professional if you are unsure about your tax filing requirements. Remember, even if you do not receive a 1099 for income earned, it’s still your responsibility to include it in your taxable income. Not doing so can be a major red flag to the IRS and can result in an audit. Optima Tax Relief has over a decade of experience helping taxpayers with tough tax situations.
Receiving a 1099 is becoming more and more common with the rise in small businesses, side hustles, and the desire for a second stream of income. With the additional income comes a different tax filing process. If you receive a 1099, it’s because you earned a certain amount of income from a non-employer and like most income, 1099 income is taxable. Here’s a breakdown of the basics of the IRS 1099 form.
What is a 1099?
IRS Form 1099 is actually a collection of tax forms, and not just one single form. If you receive these forms, it means that the sender paid you a certain amount of money, usually at least $600, in the previous year. These funds could be from income you received as an independent contractor, rental income, dividend payouts, and more. If you receive a 1099 form, so did the IRS, which means it’s your responsibility to report the income on your tax return.
Who receives a 1099?
There’s a long list of individuals who can receive a 1099. Among many other scenarios, you’ll likely receive a 1099 if you:
Are a freelancer or independent contractor
Received $600 or more for rent, prizes, awards, and other types of payment
Received $10 or more in royalties or broker payments
Received $20,000 or more via third-party apps like Venmo or PayPal
Received unemployment compensation
What are the most common types of 1099s?
We’ll break down each type of 1099 in our next post, but here are the most common ones:
1099-DIV: Dividends and Distributions
1099-G: Certain Government Payments
1099-INT: Interest Income
1099-K: Payment Card and Third-Party Network Transactions
1099-R: Distributions from Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, Etc.
What if I don’t receive a 1099 for income I earned?
1099s are usually sent out by January 31st each year, or February 15th for some. If you do not receive a 1099 for income worked, you are not off the hook for reporting this income to the IRS. You are still responsible for paying taxes on that income. If you are still waiting for a 1099 after the deadline, reach out to the payer responsible for sending it and request a copy be sent to you. Be sure to give yourself enough time to request and receive the 1099 copy to avoid submitting a late tax return.
Tax Help for Those Who Receive Form 1099
Overall, understanding the 1099 form is important for anyone who receives income from sources other than an employer. By properly reporting all income received on the form, individuals can avoid penalties and ensure that they pay the correct amount of taxes on their income. Optima Tax Relief is the nation’s leading tax resolution firm with over a decade of experience helping taxpayers with tough tax situations.
