Unit 5: Interest and Dividend Income

Returns of Capital (Nontaxable Distributions)

A return of a shareholder's investment generally made because an excess of capital has been accumulated. Returns of capital may be received in cash or reinvested to acquire additional shares at the shareholder's request. Amounts received that are NOT in excess of the basis of the stock on which returns of capital are paid are not taxable. The basis of the stock on which returns of capital are paid must be reduced.Amounts received in excess of the basis of the stock on which returns of capital are paid are reported on Schedule D, in Part I if stock has been owned short term, or in Part II if stock has been owned long term.

Interest Not Attributable to the Taxpayer

A taxpayer may receive, in their name, interest income (and often a Form 1099-INT) that does not actually belong to them, (e.g., Nominee Interest--interest that belongs to another person). It is common for a parent to hold a bank account for a minor child. If the money in the account actually belongs to the child, so does the interest income it produces. Nominee interest should be reported on Schedule B: write "Nominee Interest" and subtract the amount of such interest. The total on Line 2 should include ONLY taxable interest.

Mutual Fund

(1) An open-ended investment company that invests money of its shareholders in a (usually) diversified group of securities of other corporations. (2) A company in the business of buying an selling stocks and sharing its income with those investing in it (sometimes called a regulated investment company).

Series I bond maturity period

30 years

Interest income

A form of income earned from deposits, notes receivable, and investments in instruments such as bonds. Some interest income is taxable and some is not. Dividends (including dividends on deposits or share accounts in coops, credits unions, domestic SLAs, and mutual savings banks) are actually reported as taxable interest income Interest income reported on Form 1099-INT. If the form was not received, the taxpayer is still responsible for paying the taxes If interest income exceeds $1,500, 1040EZ cannot be filed and the interest must be reported on Schedule B, and 1040 or 1040A must be used.

Nontaxable Distributions

A general term applied to stock dividend distributions that are not taxable. These distributions gnerally take the form of RETURN OF CAPITAL, STOCK DIVIDENDS, STOCK SPLITS, and/or TAX-FREE DISTRIBUTIONS.

Tax Emempt Interest

Interest eanred on debt obligations of state and local government - mutal/munipal bonds

Dividend Reinvestment Plan (DRIP)

a dividend reinvestment plan allows a taxpayer to use dividends to purchase more shares of stock in a corportation instead of receing dividends in cash.

Series EE bonds

a non marketable, interest-bearing U.S. Government savings bond issued at a discount from the par value. Interest is exempt from state and local taxation.

Series HH Bonds

a non marketable, interest-bearing U.S. Government savings bond issued at par and purchased only by trading in Series EE bonds at maturity. Interest is exempt from state and local taxation.

Form 1099-INT

a statement of the interest your bank paid on your savings that year

Mutual Fund Distributions

an investment stratefy that allows investor to pool their money for the purpose of investing in stocks, bonds and other securities

Municipal Bond Interest

are generally issued by state and local governments to fund capital improvement projects. Local governments include counties, cities, school districts, and other administrative divisions of the states that have been granted the authority to issue bonds. The federal government DOES NOT tax municipal bond interest.

capital gains distributions from mutual funds

are treated as long-term, regardless of the actual period the mutual fund's investment is held

Qualified Dividends

distribution received on shares of common stock held by the taxpayer for more than 60 days of the 120-day period beginning 60 days before the ex-dividend date.

Nondividend Distributions

distribution that are not paid out of earning and profits

Ordinary Dividends

distributions from corporations paid out of earnings and profits taxed as ordinary income.

Stock Dividend

A distribution by a corporation of its own stock to its stockholders.

Capital Gains Distributions

Amounts paid by mutual funds, regulated investment companies, and real estate investment trusts. These amounts represent the shareholder's portion of gain for the sale of capital assets owned by these investment companies. Capital gains distributions are taxed in the year constructively received and are always considered to be held long term.

True or False: Taxpayer must both principal and interest to pay for qualified educational expense

True

Gift for opening a bank account

Deposits < $5K: gift >$10 reportable Deposits >$5K: gift >$20 reportable Cash bonuses, reward points, airline miles, are all taxable. Cash back and reward points from credit card purchases are not taxable

Capital Gains, Distributed and Undistributed

Distributed capital gains are paid in cash to the shareholders or reinvested in additional shares at the shareholder's request. Undstributed capital gains are retained by the investment company, which pays the tax on them. These gains are reinvested automatically in additional shares and reported to the taxpayer on Form 2439 rather than on Form 1099-INT. (A taxpayer who receives a Form 2439 may have a credit which can only be claimed by filing Form 1040.)

Divident income is not subject to

Employment Tax

True or False: MFS qualify for the education saving bond interest exclusion, with limiation

False

Seller-Financed Mortgage

If a taxpayer sells their home to a buyer who uses the home as their residence, and the taxpayer finances part or all of the mortgage, the taxpayer must report the buyer's name, address, and social security number on Schedule B (or an attachment). The taxpayer is also required to provide the buyer with their name, address, and social security number. The interest the taxpayer receives is taxable.

Other Interest Income

If the IRS sends a tax refund to a taxpayer who has filed an amended return or it takes more than 45 days to issue a refund, it will pay interest along with the refund Such interest is taxable. The same holds true interest on late refunds from stand and local governments. Generally, the IRS will send the taxpayer FORM 1099-INT for the year in which the interest was paid.

Interest on US T-bills, notes, and bonds

Interest is taxable for federal income tax purposes Series EE bond is the most common type of bond; they are issued at a discount and the difference between purchase price and redemption price is the interest earned. Series I bonds are issued at face value with a maturity period of 30 years. Face value and accrued interest are payable at maturity. Individual taxpayers can report interest from these either when the bond matures or is redeemed, or each year as the bond's redemption value increases.But the same reporting method must be used for all EE and I bonds. When a taxpayer redeems, he should receive 1099INT Series HH are issued at face value, interest is paid twice a year and the interest is reported as it is paid

Foreign Investments

Interest on foreign investments is taxed the same as interest received on domestic investments. (Investing in U.S. Mutual Funds that hold foreign debt instruments does NOT constitute an interest in a foreign account for this purpose, and neither does an account in a U.S. military financial facility).

Interest on education savings bonds

Series EE and I bonds can be used on a tax-free basis to pay qualified higher education expenses for a taxpayer, spouse, or dependents for whom an exemption is claimed. 2014 exclusion MAGI phaseout for MFJ or QW taxpayers between $113,950 and $143,950. MFS taxpayers are not entitled to the exclusion. S or HOH phaseout is $76,000 and $91,000. Exclusion is calculated on Form 8815 - bonds must be purchased by the owner, not a gift, qualified expenses are reduced by tax-free benefits received and by expenses used to claim the AOC and LLC; total interest received is excludable only if combined principal and interest received do not exceed the expenses.

Tax-exempt interest

State and local government debt interest is generally exempt from federal income tax but may be subject to state and local taxes. If the debt is federally guaranteed, the interest is taxable. Taxpayer may still be subject to capital gains when the investment is sold. Line 8b of Form 1040 reports tax-exempt interest. It is used to calculate the taxability of certain income items, such as SS benefits.

True or False: Interest in U.S. obligation, such as U.S. Treasury bills, notes, and bond issued by any agency of the US, is normally taxable for federal income tax purposes

True

Series HH bond pay interest

Twice a year

Form 1099-DIV

Used by banks and other financial institutions to report dividends and other distributions to taxpayers and to the IRS

Dividend Income

income received in the form of dividends paid on shares of stock or mutual funds

Mutual fund is an investment strategy that allow

investors to pool their money for the purpose of investing in stocks, bonds, and other securities

If a taxapayer's total dividend income is more than $1,500

it must be reported on Schedule B

Payment o

purchase quantities , have sales and support staff similar to the US ship product to the customers

Municipal Bonds

tax-exempt bonds issued by state and local governments

Interest Income

the interest earned on money loaned