Anyone feeling a severe post-holiday financial hangover isn`t likely to shake the headache any time soon thanks to it being tax season already. This year there will be a not insignificant number of changes, in the form of both alterations to standard forms and forms that are altogether brand new. The changes are sure to make a potentially complicated process even more so, and all taxpayers are encouraged to assemble their documents and file early, if possible. More than ever, it is imperative for everyone filing taxes to keep good records and hold on to all tax-related paperwork.
The brand new Merchant Card and Third-Party Network Payments form, to be known as the 1099-K, is sure to cause many people quite a bit of grief. This form specifically targets individuals who run a business from home or sell items or services on the side and accepts payment by credit cards or through a third party network like PayPal (which is operated by eBay). This form was created to help the IRS better detect underreporting of earned income and will likely help them flag audit targets.
The trouble with the 1099-K is that it reports the gross amount paid to the seller or merchant to the IRS, without reflecting any adjustments made for charge-backs or fees. This means that the information the IRS has may not match up with the amount reported by the seller or merchant on their income tax filing.
Another form consumers need to be on the lookout for is the 1099-MISC form coming in the mail from a credit card company or bank. The 1099-MISC form is a tax form used to account for Miscellaneous Income, which is what banks consider those promotional payments doled out to new accountholders to be. Anyone who opened up a new bank or credit card account over the past year and received cash back or reward point bonus as a result should be expecting to receive a 1099-MISC. Promotions where a new accountholder received a chunk of miles as a sign-on bonus are being valued as cash by some financial institutions, making them susceptible to a 1099-MISC.
The good news is that banks and the IRS don`t (yet) consider rewards points earned via purchases made as income. Instead, it is considered to be the same as getting a rebate and not as a commission payment. Therefore, consumers are not taxed on their credit card rewards.