Tax Season Can Teach You About Your Finances And Be a Jumping Off Point for a Future Sabbatical
If taking a sabbatical is one of your goals—whether to travel, spend time with family, or pursue a passion project—then I invite you to take the extra time to understand what your tax documents can tell you about your financial situation. This is such a great opportunity to really understand where you're at and to make informed decisions about your future!
Tax season might not be your favorite time of year, but since there’s no escaping it, why not use it to your advantage?
Your tax return is more than just numbers—it’s a powerful snapshot of your financial life. And if you’re thinking about taking a sabbatical at some point, now is the perfect time to use this information to optimize your financial strategy.
Understanding your tax situation can help you make smarter decisions about savings strategies, investments, and even the best timing for your break.
But first, you’ve got to understand what you are looking at!
Make sure to save this post for later! 📌 You can go back to it every year to support your tax season!
Let’s walk through all those documents you’ve started getting in your inbox:
W-2: Wages
Who receives a W-2?
- If you are working (and not self-employed or a contractor), you can expect to get this from your employer.
- If you changed jobs during the year or held more than one job in a single tax year, you should receive this (or another tax form below) from each employer you worked for.
This form shows:
- your taxable salary (this can include RSUs that vested during the year)
- any contributions you made to a retirement plan through payroll
- any taxable benefits you may have received from your employer
- and how much Social Security and Medicare tax you paid
- also includes applicable tax information on any Nonqualified Stock Options (NQSO). We recommend working with a CPA to make sure you’re not double taxed.
1099: Income Sources
There are different 1099 forms that you may receive, depending on your source(s) of income:
1099-NEC: Independent Contractor Income
An alternative to the W-2 is the 1099-NEC, which you receive if you work as an independent contractor (a non-employee) for a business.
1099-B: Capital Gains/Losses
You typically receive this from a financial institution where you have an after-tax investment account. This form shows any realized capital gains or losses from sales of investments that need to be reported.
Even if there were no trades in your account, some mutual funds and ETFs make capital distributions that are taxable to you as an owner of the investment (see 1099-DIV below).
Each account receives its own 1099-B.
💡 Note that if you sold RSUs during the year to cover the associated tax due, cost basis may not be accurately reported on your 1099-B. Be sure to review tax lot details to determine taxability of the sale(s), and provide any related documentation to your tax preparer.
1099-INT: Interest Income
You typically receive this from your bank where you earn taxable interest.
If you receive more than $10 in interest from any one person or institution, you would receive this form.
Interest is received on:
- cash
- money market accounts
- certificates of deposit (CDs)
- corporate and municipal bonds
- treasury bills
- savings bonds
1099-DIV: Dividend Income
You typically receive this from a financial institution where you have dividend income from:
- stock holdings
- when a mutual fund distributes capital gains to shareholders
**1099 Composite
If you have an after-tax brokerage account, you may receive a compiled 1099 that includes a 1099-INT, 1099-DIV, and your 1099-B.
1099 Corrected
You may receive a Corrected 1099 for wages or other income from an employer or other payor that shows tax information that was corrected after the original 1099 was filed and sent to you.
The 1099 will look the same as the original, but the CORRECTED checkbox is checked at the top.
You may also receive a Corrected 1099 for a brokerage account. This can happen if there was a reallocation or reclassification of investment income you received. For example, the income may be recategorized as qualified or non-qualified dividend, return of capital, or a long- or short-term capital gain distribution. These material corrections can be reported up to three years after they occur, but most income reallocations happen before the tax-filing deadline.
Be sure to provide the Corrected 1099 form to your tax preparer, even if you have already filed your return.
1099-MISC: Other Income
Includes miscellaneous income sources of $600 or more from:
- rents
- royalties
- prizes and awards
- nonqualified deferred compensation
- other income payments
1099-S: Sale of Real Estate
You receive this form if you sold real estate property. The 1099-S is typically issued by the title company.
💡 Not all real estate proceeds are taxable, but you should still receive a 1099-S and should provide it to your tax preparer.
1099-R: Retirement Distributions
You receive this if you took distributions from a retirement account. These include:
- IRAs
- pension plans
- qualified annuities
- 401(k)s
- other employer-sponsored retirement plans.
The 1099-R shows the gross amount distributed and any tax withheld.
You may receive this even if you are not yet retired. A 1099-R is generated anytime money comes out of a retirement account, including for:
- Backdoor Roth Contributions – You will receive a 1099-R for the distribution from the Traditional IRA. In May (after you’ve already filed your tax return), you will receive two separate 5498s, one for the nondeductible contribution to the Traditional IRA, and one showing the amount converted to the Roth IRA. Note that the amounts on the two 5498s may be slightly different due to interest or investment gain/loss. Be sure to file a Form 8606 to track your basis for your nondeductible contribution to the Traditional IRA.
- Roth Conversions – You will receive a 1099-R for the distribution and any tax withheld from the Traditional IRA. In May (after you’ve already filed your tax return), you will receive a 5498 showing the amount converted to the Roth IRA.
- Rollovers from one retirement account to another, including merging accounts of the same type. The 1099-R will tell you if any tax was withheld.
- Net Unrealized Appreciation – If you roll employer stock out of your 401(k) into a brokerage account, the 1099-R will show the value of unrealized capital gain at the time of distribution.
💡 Make sure to let your tax preparer know the full context around any 1099-R you receive to confirm the taxability of the distribution. Avoid paying tax when you didn’t owe any on the transaction!
1099-G: Income from the Government
If you received any income from the state or federal government, you should expect to receive a 1099-G.
Examples might include:
- unemployment income
- workers compensation
- family paid leave
- tax refunds, credits, or offsets, including kicker refunds
1099-Q: Distributions for Education
You receive this form if you take any distributions from a 529 or other education savings account.
💡 The custodian of the account is not required to determine if distributions are for qualified or nonqualified expenses, so make sure to keep good records of what the funds were used for.
1099-SA
You receive this form if you take any distributions from your Health Savings Account (HSA).
If you are using your HSA to pay your medical expenses, consider whether the HSA Shoebox Strategy would be beneficial for you. Click here to learn more about the Shoebox Strategy.
1098: Mortgage Interest Paid
If you own a home and have a mortgage on it, you are likely paying some interest as part of your monthly payment. If so, you will receive a 1098, which shows the amount of mortgage interest you paid during the tax year.
💡If your mortgage was sold during the year, or if you refinance/get a new mortgage, you should receive a 1098 from all lenders.
1095: Healthcare Coverage
This shows whether you were covered by a qualified healthcare plan during the year, and if so, for which months and which family members were covered.
If you are covered by an HSA-eligible High Deductible Health Plan, this form can help validate your eligibility for a full year’s worth of HSA contributions. Reach out to your tax preparer if you are unsure about how much you can contribute. This can get complicated if you have family coverage or had two plans during the year. The deadline for contributions to an HSA is April 15th.
If you receive a 1095-A for a Marketplace health plan, you can review any advance premium tax credits you received. Depending on your income, you may owe some of this credit back at the time of tax filing.
5498: Retirement Contributions
This form is typically generated in May after you have already filed your tax return. It is for your own records to show contributions made to individual retirement accounts (Roth or Traditional IRA) or a Health Savings Account (HSA).
💡Note that if you discover that you had an excess contribution to either an IRA or your HSA, be sure to correct it prior to filing your taxes to avoid a 6% excise tax per year until corrected.
Understanding which tax forms you should expect to receive is the first step to making your tax season go smoothly
and to plan for future goals, just like that sabbatical you’re dreaming of! 🌎
If you think you’ve reached a level of complexity where you might need a professional to help with your taxes, click here. We explain the difference between a CPA and a CFP® professional and why you might need both on your tax planning team! Read more to learn how to be tax savvy this year!
Here at Middleton & Company, we believe that being in control of your financial situation (and your taxes!) starts with understanding what you have and where it’s going. Now that’s empowering!
We view money as a tool to support your dream life. Not the other way around!
Financial Strategies for Sabbatical Planning
Understanding your current financial situation is the first step
toward making your sabbatical a reality.
As financial planners, we specialize in working with professionals who want to take an extended break from their career. Sound like you? Great! How can you do it? WITH SMART FINANCIAL PLANNING!
Here are just a few ways we help you take control of your finances (and taxes!) to help you plan for your sabbatical:
- Tax Report
Each year, we run the Tax Report for our existing clients and offer a clear and concise summary of their previous year’s tax return. This report provides valuable insights, and having a financial planner on your team helps you truly understand what all those numbers mean! We simplify complex information, highlight key takeaways, and uncover important details that might not be immediately obvious. Our thorough analysis helps identify tax planning opportunities and potential pitfalls to avoid in the current year.
- Tax Planning Scenarios
If you’re planning on taking extended time away from work, do you know how to best take advantage of that low-income year? We use the Scenario Planning tool to illustrate the tax impact of different strategies or expected changes to income. We help identify how to take advantage of those income changes to make investment accounts more tax efficient for our clients.
- Long Term Tax Strategy Implementation
We don’t just plan for taxes in the current year, we plan for your total tax over your whole lifetime. This includes working years, low income year(s), retirement income, and other anticipated life events.
- Mid-Year Tax Planning Meetings with CPAs
Each year, we offer to meet with our clients’ CPAs to have a brainstorm session about the tax planning strategies we are thinking about implementing. During that meeting, the CPA can run a pro-forma tax return to help us understand the tax impact, and highlight any guardrails we should be aware of. We love partnering with our clients’ CPAs to be intentional about the timing of strategies and to help avoid any unintended tax consequences.
- Tax Letter
Do you know what tax forms you should expect to receive each year and why? Are you confused about how to answer the Tax Organizer questions your CPA sends you after year-end? We create personalized Tax Letters for each of our clients so they know what tax forms to keep an eye out for, important reminders of tax planning strategies we implemented during the year, and any additional notes to help the CPA complete the tax return correctly.
FAQ
Why should I review my tax documents if I’m thinking about taking a sabbatical?
What tax strategies can I take advantage of if I have a low-income year during my sabbatical?
What can I do to minimize the potential of a surprise tax bill?
Are you ready to feel empowered about your finances? Are you ready to make your money work toward your dream life? Learn more about our services now.
Stay in touch! Don’t miss our upcoming webinars and live events on how to overcome barriers to take a sabbatical.
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taylor anderson
Taylor is a Certified Financial Planner (CFP®) with a knack for making complex concepts simple and visual. After taking a two-and-a-half-year sabbatical to join the Peace Corps and travel Southeast Asia, she now satisfies her travel itch by exploring the Northwest in her Sprinter van with her two boys. When she's not helping clients with financial planning, you'll find her backcountry skiing with her husband and Australian Shepherd.