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"Stuff That Comes in the Mail"

by Greg Mermel, C.P.A.

Published in the "Money and Taxes" column in PerformInk on February 13, 2009

By now, you should have received just about all of the various tax forms payers send to you and – not incidentally – also send to the tax authorities. Most should be familiar: W-2 forms, all the various flavors of 1099 forms, and the mortgage interest statements (1098 forms). But if you worked in another state or Canada this past year, you may find some unfamiliar forms appearing in your mailbox.

With one exception, all the federally-required forms should have been mailed by February 2. (The law says “last day of January,” but the deadline is pushed to the next business day when that falls on a Saturday, Sunday or holiday.) The exception involves “composite 1099 forms,” which is accountant-speak for those which roll up information from underlying 1099 forms. The Internal Revenue Service gave those issuers a blanket extension until February 16 this year. Here’s why they did that.

Composite 1099s mostly come from stockbrokers to report the dividends, interest and passed-through capital gains from the investments in your accounts. Each one of those investments results in a 1099 being issued to the brokerage firm, and only after those have been received can the figures be passed along to you. Any mutual funds in your investment account create another layer because the 1099s they issue are also composite ones, based on all the investments they held during the year. So the broker is waiting for the mutual fund, and the mutual fund is waiting for the companies. Add in a mutual fund that invests in other mutual funds (a “fund of funds”) and you pretty much have the nursery rhyme, “The House that Jack Built.”

In past years, the issuers of composite 1099s scrambled to meet the January 31 deadline, often using estimated or preliminary data. If those were wrong, waves of corrected 1099s would follow. This confused taxpayers and made the brokerage firms look stupid.

Granted, many of them were stupid, but why rub it in?

The States

In the not-so-distant past, people who worked in another state only had to file a tax return in that state if they were paid as employees and if their employer actually withheld income tax for that state. As I have noted several times over the past few years, states have been cracking down on employers about multi-state withholding.

Now, increasingly states are requiring withholding on fee income paid to out-of-state individuals, especially entertainers. California led the way, starting with performers and adding everyone else starting last year. In most cases, you don’t absolutely have to file a tax return in that state, but you should. First, you are likely to get a refund. Second, some hold grudges, and might make trouble later if you move there; again, California is out front on that.

Many states – Minnesota and Massachusetts, among others – simply require the payer to show the withholding in a box at the bottom of the 1099. The state withholding box has been on the form for decades, but was rarely used.

California (of course) and some other states have their own forms that must be used both by the payer to report the withholding and by the payee to claim it on their tax return. These do not look like any other tax form you routinely receive, and, worse, may have been given to you when you performed there instead of mailed at the end of the year. If you think a jazz musician’s road manager is thinking about tax forms at 4:00 AM with a long travel day ahead, then you obviously don’t know many roadies. Watch out for these forms, pay attention to whether tax was taken out, and if you do not have the form, call the venue. Most California presenters are used to calls from performers needing copies of their 592-B forms and will be helpful.

A State

Canada – you know, the pink blob on your globe just above the U.S. – has its own set of tax reporting forms, deadlines and rules. A comprehensive explanation of the tax laws of another sovereign nation is way beyond the scope of this column, so I’ll try to give you the short version as they apply to U.S. citizens who do not reside in Canada.

All the Canadian tax reporting forms are T4(something): T4A, T4NR, just plain T4 and so on. The deadline for mailing them to payees is the end of February, though many Canadian payers fulfill the national stereotype of promptness and helpfulness by getting them out earlier.

Generally speaking, if your only Canadian income is passive, you do not have to file a Canadian income tax return. The amount, if any, withheld is the final tax balance. This applies to dividends, interest, royalties (such as ASCAP or Samuel French) and residuals for films, etc., that were made outside Canada.

But if you actually worked there, you must file a Canadian tax return. The U.S.-Canada income tax treaty provides that U.S. “artistes and athletes” working in Canada are exempt from Canadian income tax if they earn less than $15,000 there during the year. As a result, you probably won’t owe tax and will get a refund of the amount withheld. The Canada Revenue Agency was formerly content to keep the refund, and did not insist that these non-star entertainers file.

No more. If you ever want to work in Canada again, file the return. Unfiled prior tax returns = no subsequent work visa. And they mean it. Just ask my client who spent several hours in a holding cell at the Vancouver airport.

Free Offer

Every year during the income tax season, I offer free copies of my “Checklist of Potential Deductions...” for those in the arts. Just call my office, or send an email to checklist@gregmermel.com.

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