Keepseagle Settlement Payment and Your Form 1099 Information Ruby Ward (1), Trent Teegerstrom (2), JC Hobbs (3), and Guido van der Hoeven (4) 1 Extension Economist & Associate Professor, Utah State University 2 Associate Specialist & Director of the Arizona FRTEP program, University of Arizona 3 Assistant Extension Specialist, Oklahoma State University 4 Extension Specialist & Sr. Lecturer, North Carolina State University Utah State University is an affirmative action/equal opportunity institution.
Rural Tax Education http://ruraltax.org/
Rural Tax Education Members
Tax Fact Sheet Topics
Tax Fact Sheet Topics
Key Items to Know All settlement recipients will need to file a federal income tax return and report this settlement as income. File a return regardless of their current income level, land status, current employment status, and even if they have not filed a Federal income tax return before. Failure to file could result in additional amounts owed to the IRS for interest and penalties.
What s Next? We will cover the most common actions recipients will need to take after receiving a Form 1099. Individual situations will vary and may have complicating factors. This is for educational purposes only. Seek the advice and assistance from an income tax professional.
Your 1099 MISC and/or 1099 C Each settlement recipient should have received a Form 1099 MISC and/or a Form 1099-C around mid-january. If you have not received a Form 1099 MISC, check with the Keepseagle Claims Administrator.
Filing Options Covered 1099 Informational Returns Reporting Your Payments Track A or Track B Settlement Payment Reporting debt relief Payments for either Track A or Track B Other Issues Estates Incorrect information on Form 1099
1099 Informational Forms Used to report various types of income. Each form filed one copy sent to IRS and one to the recipient of the payment. The IRS will match the amounts from a Form 1099 to the recipients income tax return. Form 1099-MISC used to report a variety of income. Form 1099-C used to report cancellation of debt.
1099-MISC Recipients of both track A and track B will receive a form 1099. It will show the total amount in box 3 other income. Track A - $62,500 $50,000 + $12,500 paid to IRS Track B - $250,000 It will also show any tax withheld (paid directly to IRS) in box 4. Track A - $12,500
Example 1 Part 1: Joe Elder qualified for and received a settlement under Track A. Joe receives a check for $50,000 and $12,500 is paid to the IRS in Joe s name. Joe receives a 1099-MISC showing $62,500 in Box 3 Other Income and $12,500 in Box 4 Federal Income Tax Withheld.
Reporting 1099-MISC payments The amount from Box 3 Other Income. Increase taxable income Increase income tax owed The amount from Box 4 Federal Income Tax Withheld. Deducted from income tax owed If the net effect may be a refund or it may be that you will owe additional income taxes.
Tax Treatment If Still Farming If you were farming in 2012 Report the settlement amount from 1099-MISC box 3 on Form 1040 Schedule F: Profit or Loss From Farming. Line 8 Other Income Identify the amount as USDA Settlement. The net income from Schedule F (Form 1040) is subject to both income tax and self-employment tax. Include the amount paid to the IRS (1099-MISC Box 4) as part of income tax paid (Form 1040 line 62).
Example 1 Part 2: Joe Elder was farming in 2012. After receiving the Form 1099-MISC seen in Example 1 Part 1 (above), Joe files a tax return showing the amount from Box 3 Form 1099-MISC as Other Income on Line 8: Other Income of Schedule F (Form 1040), Profit or Loss from Farming. Identify this amount on Line 8 as USDA Settlement USDA Settlement
Example 1 Part 2 Cont.: Joe Elder was farming in 2012. After receiving the Form 1099-MISC seen in Example 1 Part 1 (above), Joe files a tax return showing the amount from Box 3 Form 1099-MISC as Other Income on Line 8: Other Income of Schedule F (Form 1040), Profit or Loss from Farming. Identify this amount on Line 8 as USDA Settlement Joe includes the amount from Box 4 Form 1099-MISC on line 62 Form 1040 as part of his payments of federal tax.
Tax Treatment If Not Farming If you were NOT farming in 2012 Report the settlement amount shown on Form 1099-MISC box 3 on the Form 1040. Line 21 Other Income Identify the amount as USDA Settlement. The net income is subject to income tax. Include the amount paid to the IRS (1099-MISC Box 4) as part of income tax paid (Form 1040 line 62).
Example 1 Part 3: Joe Elder, after receiving the Form 1099-MISC seen in Example 1 Part 1, files a tax return showing the amount from Box 3 Form 1099-MISC as Other Income on Line 21 of his Form 1040. USDA Settlement Joe includes the amount from Box 4 Form 1099-MISC on Line 62 of his Form 1040 as part of his payments of federal tax.
Example 2: Frank Farmer qualified for a Track B settlement at the maximum level and receives a check for $250,000. He received a Form 1099-MISC with $250,000 in Box 3 Other Income and nothing in Box 4 Federal Tax Withheld. Frank also farms and has raised farm income of $48,000.
Example 2 continued: Frank reports his raised farm income of $48,000 on Line 2, Schedule F and the $250,000 settlement income on Line 8, resulting in a total of $298,000 of gross farm income. Frank s resulting net farm income (gross income less expenses) is reported on IRS Form 1040 on Line 18.
Schedule F Expenses and Profit
Schedule F or Form 1040 The resulting Profit of $260,000 may trigger alternative minimum tax (AMT) due to the amount of net income. However, there were only 13 recipients of Track B payments. These individuals should contact professional help to evaluate the impact of AMT, if any.
Settlement Form 1099-C Cancellation of Debt Form 1099-C is used to report cancellation or forgiveness of $600 or more of debt. Cancellation of debt is generally reported on Form 1040 Line 21. However, Qualified Farm Indebtedness may be excluded from income if specific requirements are met under Internal Revenue Code Sec. 108. IRS Publication 4681, Cancelled Debts, Foreclosures, Repossessions, and Abandonments, contains detailed information on this subject
Cancellation of Debt Example Example 3: Joe Elder from Example 1 has a job with an annual salary of $50,000 with $5,000 withheld for income taxes. He is still farming and has filed income tax returns including a Schedule F on tax return. He received the $50,000 and the $12,500 tax liability payment. He received a $200,000 loan forgiveness payment with the $50,000 tax liability payment. This will possibly put him into the 33% tax bracket. Apply Code Section 108 to potentially reduce the tax liability.
Implication on Other Taxes The settlement may have implications on other tax issues as well. It may affect earned income credit, child care credit, and tax on social security benefits. The net result may be that the recipient gets a tax refund or that the recipient may owe Federal income tax. Each individual s case may be different.
Implication on Other Taxes Example 4: Say that Joe Elder from Example 1 was retired and receiving $12,000 of social security benefits. Assuming that Joe is single, and social security benefits and the settlement of $62,500 were his only sources of income. The settlement would cause part of Joe s social security benefits to be taxable. The net effect after deductions would be that Joe would owe $11,405 in taxes. However, as he would be able to apply his $12,500 of tax payments, Joe would ultimately receive a refund of $1,095. $12,000 x.85 = 10,200 (taxable portion of SS) $10,200 + $62,500 = $72,700 gross income $72,700 11,200 = $61,500 of taxable income $11,405 in income taxes owed in this example.
Implication on Other Taxes Continued Example 5: Joe Elder from Example 1 has a job with an annual salary of $50,000 with $5,000 withheld for income taxes. He is still farming and has filed income tax returns including a schedule F on tax return. He received the $50,000 and the $12,500 tax liability payment was paid to IRS. Total Income = $112,500 Joe Elder is single SE tax = $6,141 ($50,000 x 0.133) x 0.9235 Taxable income after deductions = $99,679 ($112,500 - $3,071 - $3,800 - $5950) Deductions: ½ SE tax, Exemption amount, Standard deduction for singles) Income tax owed: $21,370 (Joe is in the 28% bracket by $14,029: tax equals $3,928 + $17,442)
An Estate Receives the Settlement Estate is Closed: Distribute the income from the Form 1099 received for estate (EIN) to the heir(s) through a 1099 nominee process. Estate is Open: The income is included in the estate s return and is either taxable to the estate if the income stays in the estate or taxable to the heir(s) if the income is distributed to them. Estate is in a Trust: Look at the Trust Instrument. Income may be taxed inside the trust or it may distributed to the beneficiary(s) and is taxable to them. NOTE: Look at a state s rules for Estates and Trusts.
Errors on Form 1099 s Some may have received a 1099 with errors. Request a corrected Form 1099. May need to file an extension on your income tax return. Work with a tax professional.
Conclusion All Settlement Recipients Need to File an Income Tax Return If you do not, you may owe additional interest and penalties You may get a refund or you may owe taxes This program was for educational purposes and reported general situations Every case is different work with a tax professional to deal with your individual situation