Among the potentially confusing, but important, tax documents that have probably already begun arriving in your mailbox, and will continue arriving for the rest of this month, are the familiar sounding W-2, 1099, and 1098. These are the most common documents, and of course, there are other forms and documents that you may receive, but I want to focus on these three for a minute.
If you are a salaried employee of a company, you will receive a W-2. “W-2” is the arbitrary number assigned to the form by the IRS. You will get a W-2 from each company that you worked for in 2008. The W-2 shows the total amount that the company paid you throughout the whole year. It also shows how much of your income was withheld to pay your income tax bill. The income shown on your W-2 (or all of them together, if you get more than one) must be reported on your tax return. It is this income that will be used as a starting point for figuring out how much tax you owe.
A 1099 is similar to the W-2. It shows income you earned, but not from a company you were employed by. A person hired to do a single, temporary job typically has their income from that job reported on a 1099. Interest and dividends you earned from bank accounts or investments is also reported on a 1099. Just like the W-2, you’ll have to add up the income shown on all your 1099s and report it on your tax return.
A 1098 shows tax-deductible interest you paid during 2008. The most common 1098 is from the bank that holds your mortgage. The form will show all the mortgage interest you paid. You’ll want to be very careful not to miss any 1098s. All the interest you paid, shown on all the 1098s you receive, is tax-deductible, which means you can subtract every dollar in interest from your taxable income. And lower income means lower taxes.
One final word about these tax forms – the IRS gets duplicate copies of them. They will compare the numbers on the forms they receive with the numbers you report on your tax returns. If you’re thinking about not reporting some income shown on one of your forms, you can count on the IRS noticing and following up with you.
This article originally appeared in the January 21, 2009, edition of the Greenhorn Valley View.