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What are W2 and 1099?
Form W-2 is an informational form that is used by employers to report withholding on employee wages.Form 1099 refers to a series of informational forms that are used to report other types of income. There are a number of different types of forms in this series; some common ones are Form 1099-MISC, used among other things to report compensation income paid to non-employees; Form 1099-INT, used to report income earned on interest-bearing accounts; Form 1099-DIV, used to report income from dividends; and Form 1099-B, used primarily by brokerage firms to report income from sales of stock.The IRS has a searchable database of forms and publications, Forms & Pubs, on its Web site. Generally, if you want to find out about a specific form, you can use that database to find both the form and the instructions for its use. If you want to find out about a specific topic, you can also use that database to search for publications on that topic. I use this a lot. The IRS has one of the best publicly available databases on a US government site, in my opinion.
What are the tax implications of having a joint bank account?
There are no tax issues unless you have interest income. This isn’t usually a problem with household checking accounts, but lets suppose you have a savings account with a good interest rate and substantial assets.By default, the person who receives the 1099 should claim the interest income. This will be the person whose SSN is associated with the account.Now, let’s assume that you are the primary account holder, and receive the 1099, but your girlfriend wants to claim half of the interest. Here you are considered a “nominee recipient” of half of the interest.Follow the (very specific!) instructions on Schedule B for reporting nominee interest; but essentially, your total income will not include this amount.Now you need to fill out a 1099-INT and give it to your girlfriend, perhaps over a romantic dinner. And you also send a copy of the 1099 to the IRS, with a Form 1096. She will use this 1099 to fill out her own taxes, and the IRS will use the copy you sent them to make sure everything is good.Consult a qualified tax professional for reliable advice.
What is the difference between a W9 and 1099?
W-9The Purpose of Form W-9 is to request the taxpayer identification number (TIN) of a U.S. person.Form W-9 is used by persons required to file information returns with the IRS to get the payee's (or other person's) correct name and TIN. For individuals, the TIN is generally a social security number (SSN). However, in some cases, individuals who become U.S. resident aliens for tax purposes are not eligible to obtain an SSN. This includes certain resident aliens who must receive information returns but who cannot obtain an SSN. These individuals must apply for an ITIN on Form W-7, Application for IRS Individual Taxpayer Identification Number, unless they have an application pending for an SSN. Individuals who have an ITIN must provide it on Form W9.Withholding agents may require signed Forms W-9 from U.S. exempt recipients to overcome a presumption of foreign status. For federal purposes, a U.S. person includes but is not limited to:1)U.S Citizen2) A partnership, corporation, company, or association created or organized in the United States.3) Any estate etc.1099- MISCYou may be required to file/report returns for certain types of payments made/received during the year. For example, you must file Form 1099-MISC, Miscellaneous Income, to report payments of $600 or more to persons not treated as employees (for example, independent contractors, vendors, free lancers etc) for services performed for your trade or business. We should not use Forms 1099 to report wages and other compensation you paid to employees; report these on Form W-2 (Wage summary).This form can report a huge variety of things, and the way you report the information from this form can also vary widely. Some are common and most important factors to drive from 1099 Misc are:BOX 1- RentBOX 2 –RoyaltiesBox 3- Other incomeBox 7 • Nonemployee compensation.If you work as an independent contractor for substantial periods during the year, then the IRS will treat you as self-employed. Self-employed taxpayers must report 1099-MISC income on a Schedule C attachment to their tax return.In addition, you are also liable for Social Security and Medicare taxes, which you calculate on Schedule SE and attach to your return.Thanks!
If you receive a 1099-INT as a nonresident alien, and that is your only income, do you have to file a 1040NR and report it to the IRS?
Probably not.According to the Internal Revenue Service, an individual who is a nonresident alien for tax purposes must file Form 1040NR if the individual received interest income from U.S. sources and not all of the U.S. tax that is owed was withheld on that income.For 2022. an individual may claim a personal exemption of $4,050 if the individual cannot be claimed as a dependent by anyone else. (Indian residents who are students or business apprentices, Canadian residents, Mexico residents, South Korean residents, and U.S. nationals may usually take an additional $4,050 exemption for each spouse and dependent.)Essentially, this means that if the interest income from U.S. sources was less than $4,050, the individual had no other income from U.S. sources, and the individual cannot be claimed as a dependent of anyone else, then a Form 1040NR is probably not required.(Although there are some infrequently encountered exceptions. See instructions https://www.irs.gov/pub/irs-pdf/... particularly page 8, table A. Also see Form 1040NR. https://www.irs.gov/pub/irs-pdf/... . See a tax professional for personal advice and guidance.)
In law what is the De minimus effect?
A real life example of “De minimis”…You have a bank account that paid you 87 cents of interest in 2022. The bank does not give you a 1099-INT form reporting that interest. Why? Because reporting 87 cents of interest is “de minimis”• It’s an amount of interest that is considered insignificant. The IRS would spend more money processing the form than they would collect in taxes, so they’ve given instruction to the bank not to bother with reporting such small amounts.Similarly, if you tried to sue your neighbor for 87 cents, the suit would be rejected as “de minimis”. An actual trial would cost far more than the amount of the lawsuit.
In which situations are banks required to mark “yes” for the "FATCA filing requirement" in form 1099-INT?
In 2022. FATCA was created to solve the problem of U.S. taxpayers with accounts at foreign financial institutions who did not report their foreign income.Some foreign financial institutions report information about the accounts of U.S. taxpayers to the IRS. These foreign financial institutions will prepare a Form 1099-INT for the U.S. taxpayer’s accounts and check the FATCA box on the form. Foreign financial institutions are penalized by the IRS if they do not agree to report.The U.S. taxpayer would then typically file Form 8938 if the value of those assets is more than the applicable reporting threshold. See the instructions for Form 8938 for those thresholds.I am usually pretty good at decryption of IRS rules and regulations, but these are dense! The above is a generality. See a tax accountant if you think any of the above or below might apply to you.According to the IRS instructions for Form 1099-INT:“Check the box if you are a U.S. payer that is reporting on Form(s) 1099 (including reporting payments in boxes 1, 3, 8, 9, and 10 on this Form 1099-INT) as part of satisfying your requirement to report with respect to a U.S. account for chapter 4 purposes as described in Regulations section 1.1471-4(d)(2)(iii)(A). In addition, check the box if you are an FFI reporting payments to a U.S. account pursuant to an election described in Regulations section 1.1471-4(d)(5)(i)(A).”Section 1.1471-4(d)(2)(iii)(A):“Participating FFIs that are U.S. payors (other than U.S. branches) shall be treated as having satisfied the chapter 4 reporting requirements described in paragraph (d)(2)(i) of this section with respect to accounts that the participating FFI is required to treat as U.S. accounts, or accounts held by owner-documented FFIs, if the participating FFI reports with respect to each such account either -(1) The information required by chapter 61 and described in paragraph (d)(5)(ii) or (d)(5)(iii) of this section; or(2) The information described in paragraph (d)(3)(ii), (d)(3)(iii), or (d)(3)(iv) of this section. However, such participating FFI that is required to report on such accounts under chapter 61 is not relieved of that obligation.”Section 1.1471–4(d)(5)(i)(A):“Except as otherwise provided in this paragraph (d)(5), a participating FFI may elect under section 1471(c)(2) and this paragraph (d)(5) to report under sections 6041, 6042, 6045, and 6049, as appropriate, with respect to any account required to be reported under this paragraph (d). Such reporting must be done as if such participating FFI were a U.S. payor and each holder of an account that is a specified U.S. person, passive NFFE that is a U.S. owned foreign entity, or owner-documented FFI were a payee who is an individual and citizen of the United States. If a participating FFI makes such an election, the FFI is required to report the information required under this paragraph (d)(5) with respect to each such U.S. account or account held by an owner-documented FFI, regardless of whether the account holder of such account qualifies as a recipient exempt from reporting by a payor or middleman under sections 6041, 6042, 6045, or 6049, including the reporting of payments made to such account of amounts that are subject to reporting under any of these sections. A participating FFI that elects to report an account under the election described in this paragraph (d)(5) is required to report the information described in paragraph (d)(5)(ii) or (iii) of this section for a calendar year regardless of whether a reportable payment was made to the U.S. account during the calendar year. A participating FFI that reports an account under the election described in this paragraph (d)(5) is not required to report the information described in paragraph (d)(3) of this section with respect to the account. The election under section 1471(c)(2) described in this paragraph (d)(5)(i)(A) does not apply to cash value insurance contracts or annuity contracts that are financial accounts described in § 1.1471-5(b)(1)(iv). See paragraph (d)(5)(i)(B) of this section for an election to report cash value insurance contracts or annuity contracts that are U.S. accounts held by specified U.S. persons in a manner similar to section 6047(d).”
What is Islamic banking about? What are the ethical, legal, and religious nuances attached to it?
UPDATES at the end.===================================================This is going to be slightly long post. I have always been a proponent of Islamic finance and have been promoting it at all forums since my undergrad. I worked in conventional banking for 5 years and yet I kept promoting Islamic Banking. Then I did my masters in finance from one of the top business school of the world. Subsequently I have worked in Islamic investments as well as Islamic banking for almost 8 years and got a chance to see the transactions and structures used in Islamic financing up close and personal. After working on a few landmark transactions recently in structured finance, Sukuk and syndicate financing, I have come to the definite conclusion that Islamic banking as practiced today is total charade.No need to repeat the Quranic verses here but the essence of quranic injunctions is that debt should be interest free or non-profit transaction. If you want to engage in profitable transactions, do trade which entails taking equity stake. That was the argument at the prophets time that both trade and lending for profit are the same i.e. if you treat money as commodity, there is no difference between trading and interest based lending in letter of the law. However, Quran forbade against lending and approved trading. I like to think of it as difference of spirit of the law and letter of law.Anyway, my smell test is the duck test. If it looks like a duck, walks like a duck, and quacks like a duck, then it is a duck. Similarly in Islamic finance transaction, if the transaction is a debt based transaction, and then it is riba. Now matter how many commodities we trade to show it as a trading transaction.Initially it was stated that global system is interest based system and we cant just remove it and establish an Islamic system overnight. We need a mid way approach. A murabaha structure was such mid-way structure wherein by carrying out certain steps, a debt transaction would be Islamized. Probably the Islamic scholars thought they were innovating but they were following in the footsteps of the Christian clergy who gave their blessing Contractum Trinius allowing Christian merchants/bankers to bypass Christian rulings against Usury.What is even worse that instead of being considered the mid-way, faulty, stopgap arrangement, Murabaha is now considered a standard uncontroversial instrument of Islamic finance beyond reproach. A more disservice to Islamic finance hasn’t been done.The global Islamic finance industry is touted anywhere from US$1.5 trillion to US$ 4 trillion. This amount has everyone salivating and trying to come up with products to get a piece of this pie. The international bankers have been very active in this segment and sharia scholars have been very happy to guide them (for a fee of course) on how to Islamize the products available in the conventional financing.To take a small digression. Regulations are there to safeguard market participants. However, there was a huge market in regulatory arbitrage products before the credit crisis which allowed sophisticated investors to by pass the limits set up by regulators for investors protection. Lawyers and investment bankers would come with most convoluted structures to bypass legislation/regulations. Lawyers, investment bankers and accountants earned handsome fee for this business. Investors were at the losing end. Similarly there is significant tax arbitrage opportunities wherein foreign investors to US can invest through Cayman Island structures to take benefit of the loopholes in tax codes. US treasury loses out on taxes, investor loses out on expenses of capital structures/ multiple SPVs. Only people who make money are lawyers and accountants for coming up with this structure. Similarly, we have sharia arbitrage wherein a product or service may not be sharia compliant, but enough lawyers and sharia scholars bang their heads together on it for a while (and the incentive of hefty of course) they will make it a sharia compliant product.Some of the recent most used products that I have seen that are down right riba with just a lip service (read sharia fatwa) to sharia compliance are1. Tawarruq or reverse murabaha2. Wa’ad3. Sukuk4. Sharia compliant derivates (oxymoron if ever there was one)5. Profit rate swapsThere will always be people who will continue to justify one product or other and have detailed fatwas and explanations that how a certain transaction is sharia compliant but if it doesn’t pass the smell test, it is Riba.The irony of it all is that Islamic finance doesn’t ask you to change the world or come up with paradigm shifting products. The best product that fulfills the criteria of Islamic finance and has been in existence for ages is operating lease. The bank owns the equipment (there is no lending of money at all, no rotation of commodities). The bank leases/rents the equipment for its use. At the end of lease term, the bank gets the equipment back. The bank takes the risk in any increase in demand for the equipment or excess depreciation in the value of the equipment. Whereas Islamic banks and central banks in Islamic countries may look down on such transactions, banks in the west have their operating lease arms as well as operating lease portfolios in their books. As such, it is not like Islamic banks are being asked to do reinvent the wheel.The other transaction is where the bank acts a developer. For example, you bring a real estate project to a bank. Rather than giving you debt for construction financing, bank has two choices: one) if it believes in the economics of the project (it was willing to give you finance, wasn’t it) it should invest as equity holder sharing both on the upside and downside of the project when it is completed. Two) it can act as a developer i.e., sign an agreement with you to develop the project against some agreed upon costs to be paid to the bank upon delivery of the complete project or as per agreed terms. This is similar to Istisna. For banks in Islamic countries this sounds radical but western banks are already doing the similar transactions under the aegis of banking.From a depositor perspective how will this work. Depositor has two main options. To place money with the bank in current account. Or deposit money with the bank in an investment account. There can be multiple types of investment accounts to cater to the need of depositor in terms of liquidity, risk and return parameters. The lowest risk product could be in the form of a REIT fund with weekly/monthly etc liquidity. Bank on behalf of investors/depositors buys rented real estate. Depositors will get rental income from the property as return on their deposits (after bank deducts the necessary fees etc). The depositor is allowed to withdraw his investment at the NAV of the fund which can go up and down based on the real estate market performance. Similarly, investors seeking higher returns can invest in higher risk products such as equipment leases, istisna transactions etc.This is risky and requires due diligence on part of customer. Believe it or not, depositing in any bank is risky. There is this illusion among depositors that conventional bank deposits are safe. They don’t realize that banks are highly regulated organizations and carry implicit or explicit guarantees from government. Similarly, a strong regulator can easily be setup for such banks. As I said earlier, there is no need for additional regulator as such services are already regulated by existing regulators.The aforementioned idea of the bank taking a loss when property value goes down is not that radical either. Amir Sufi and Atif Mian in their award winning and critically acclaimed book House of Debt also propose a similar solution for mortgage financing. Their justification which they argue through data and statistics is that this is more fair for everyone (for the bank and mortgagee) as well as leads to less frequent or severe bubbles.Obviously lot of transactions cannot be done on Ijara or Istisna basis. The banks may actually have to engage and in real commodity transactions. Buy commodities, have warehouses to store them, act as market maker and occasionally sell them at losses. Again not a radical concept. Goldman Sachs and JP Morgan do it. In the words of Goldman Sachs chairman, “we are doing God’s work”. Obviously conventional banks are doing the transactions and leading the market which the Islamic banks should have been doing by design. But the latter and their central bankers do not even consider such transactions which are by design sharia compliant. (No fees for the sharia scholar I presume.)Does this mean that Islamic finance banks will not fail, they will not have frauds, there will not be bubbles? No, we may have all of those things because any system is only as good as the people running it and checks and balances built in to it. Why is it that when conventional banks fail and are bailed out, it is the fault of management or regulator but if an Islamic bank fails it is the fault of underlying economics.Anyway, Islamic finance is not a radical concept. There is a paper by Irving Fisher called Chicago Plan which takes you in the direction of islamic finance. (I provide few links at the bottom which show that islamic finance is already being recommended as zero fractional reserve banking in the West). All the products already exist and conventional banks already carry out such transactions. Islamic Finance is a concept which avoids debt and debt like structures.The only regulatory disadvantage it has is the tax code. Tax code treats interest (or profit on financing) payments as tax deductible compared to returns on equity. From capital structure perspective. Modgiliani and Miller proved decades ago that capital structure doesn’t make a difference on before tax basis. Now only if the tax code is modified that it doesn’t penalize equity investors and benefit debt providers.============= Update ==========Purdue is experimenting with equity finance of student loans. Atif Mian and Amir Sufi recommend a similar approach in their book for housing finance. This is an example of Islamic financing without calling it Islamic financingAt Purdue, student aid based on future earnings could revolutionize college debtHere is Matt Klein in Bloomberg talking about making banks all equity: The Best Way to Save Banking Is to Kill ItFinally, Stanford University’s John Cochrane talking against fractional reserve banking i.e. all equity funded bank
What is a W-9 form?
Form W-9 is an IRS created form used by an individual or an entity, like a company, to request the taxpayer identification number (TIN) and other information from parties they have paid.  A TIN number is typically an individual’s social security number or a company’s employer identification number.  The information collected on Form W-9 by the requester is used to complete an “information return”.Information returnAn information return, like Form 1099-MISC, is used to communicate to the IRS reportable payments made to certain parties in the normal course of business.  A common reportable payment is one in excess of $600 paid to an independent contractor.  In this case the company would ask the independent contractor to complete and return a Form W-9.  Please note Form W-9 should only be used if you are a U.S. person (including a resident alien) or company.Federal tax classificationForm W-9 also asks for a party’s federal tax classification.  This is helpful to the W-9 requester as certain types of payments made to specific entities do not need to be reported to the IRS on an information return.  In addition, the tax classification can be used along with the exempt payee code to determine that backup withholding is not required.Backup withholding if Form W-9 is not providedIf Form W-9 is not provided to the individual or entity that requests it, future payments can be subject to having part of the payment withheld (known as backup withholding) and remitted directly to the IRS.  This is similar to the way federal tax is withheld from an employee paycheck.  The current backup withholding rate is 28%.  In most cases, just remitting Form W-9 to the requester eliminates any requirement for backup withholding.IRS reviewThe IRS summarizes the total payments reported on information returns and compares the total amount to the income reported on the taxpayer’s income tax return.  If there are discrepancies the IRS may request further information from the taxpayer or initiate an audit.The following is listed under “Purpose of Form” in the IRS Form W-9 “General Instructions” section.An individual or entity (Form W-9 requester) who is required to file an information return with the IRS must obtain your correct taxpayer identification number (TIN) which may be your social security number (SSN), individual taxpayer identification number (ITIN), adoption taxpayer identification number (ATIN), or employer identification number (EIN), to report on an information return the amount paid to you, or other amount reportable on an information return. Examples of information returns include, but are not limited to, the following:• Form 1099-INT (interest earned or paid)• Form 1099-DIV (dividends, including those from stocks or mutual funds)• Form 1099-MISC (various types of income, prizes, awards, or gross proceeds)• Form 1099-B (stock or mutual fund sales and certain other transactions by brokers)• Form 1099-S (proceeds from real estate transactions)• Form 1099-K (merchant card and third-party network transactions)• Form 1098 (home mortgage interest), 1098-E (student loan interest) 1098-T (tuition)• Form 1099-C (canceled debt)• Form 1099-A (acquisition or abandonment of secured property)Use Form W-9 only if you are a U.S. person (including a resident alien), to provide your correct TIN. If you do not return Form W-9 to the requester with a TIN, you might be subject to backup withholding.For more information on Forms W-9 and 1099 see W9manager.com.Disclaimer • Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.
How effective is it to learn something by explaining it to someone else?
Hi,You asked, How effective is it to learn something by explaining it to someone else?It is very effective, because through the process, you learn what you don’t know.Among my friends, I am considered something of a tax and personal finance whiz.So from time to tome, they will call me with a question.Usually, the question is something I don’t know the answer to and I have to go and research.My friends help me expand my knowledge.Sometimes, they also share with me what they have learned that I don’t know.This all started with me explaining how some personal finance concept worked or instructing them in something.Examples:How to do your taxes yourself with Turbo TaxWhat’s a 401K and what’s an IRA?What’s a W2 and what’s a W4?What’s the significance of the exemptions on the W4?What’s a 1099 Misc, a 1099B, a 1099D, a 1099 Int?What’s the Earned Income Credit?These are examples of tax related information I’ve taught some friends.I have also taught investment related information.In fact, I am very proud of a money workshop I conducted at an elementary school.It was a 3 part workshop, Earning Money, Spending Money, Saving Money.And in the Saving Money module, I was able to teach the difference between a stock, a bond and a cash account such as Fixed Deposit, Savings or Money Market.Take on the challenge of teaching anyone something, and you will become much better at it yourself - guaranteed!
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