Investment income is taxable income. What should we expect at the end of every year?
Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes. - Benjamin Franklin
The worst feeling is being surprised by tax documents in the mail after filing our taxes. Let's review what we should expect to receive before April.
What is taxable?
Any money we make on our investments is taxed. We realize our gains when we sell our assets, and by locking in a profit, we create a taxable event. If we don't sell, the paper gains stay unrealized and non-taxable.
Based on how long we've held the shares, tax rates on the capital gains will differ.
Outside of buying and selling shares, we can also earn income from our investments. These direct cash payments are also taxed. They can come from dividends, interests, and partnership distributions.
Our brokerage prepares a 1099 form for each taxable year. The 1099 forms come in different flavors, and we may receive multiple. Below are the various forms explained and in order from most common to least common.
We should be especially mindful when selecting K-1 generating investments. They can be complicated, so it's beneficial to have an accountant or professional help us prepare our taxes.