Chapter 5 Interest and Dividend Income

paula cashed U.S. savings bonds yielding $1,000 interest. also received $750 interest on a phoenix, Arizona municipal bond. Tax Treatment for both Fed and CA CA textbook pg 135

Fed: 1040A line 8a $1,000 1040A line 8b $ 750 CA: Schedule CA 540 line 8 column A $1,000 column B $1,000 column C $ 750

Ordinary Dividends

Fed: 1040A line 9a CA : no adjustment The most common type of distribution and are the portion of a corporation's profit paid to the shareholders. While some ordinary dividends are taxed as ordinary income, qualified dividends are treated as long-term capital gains.

Municipal Bonds

municipal bond interest Fed- not taxed CA - not taxed if from CA taxed if income derived from state or local bonds issued outside CA issued by state and local government 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. Federal government DOES NOT tax municipal bond interest Some state and local governments do not tax on the interest. others tax, other than their own. Still others tax all municipal bonds, including their own. Municipal bonds interest reported on 1099-int box 8 if tax exempt.

Dividends

are paid to shareholders(people who own stock) of corporations. They represent the shareholder's portion of the corporation's profits. .2 common dividends are 1) taxable- Credit union dividend and 2)Tax-exempt interest dividends paid by mutual funds.

nontaxable distribution/ textbook page 5.11

can be received in cash or reinvested at the shareholder's request to acquire additional shares. The basis of the stock must be reduced by the amount of the distribution. amount received are not taxable until the remaining basis is reduced to 0. the returns of capital are not taxable.

1099-Div

. Box1a TOTAL ORDINARY DIVIDENDS 1040A line 9a if the total >1,500 then Schedule B part II if the total <1,500 then 1040A line 9a directly. . Box 1b QUALIFIED DIVIDENDS 1040A line 9b This amount is already included in Box 1a this amount gets lower rate since treated as long term capital gain . Box 2a TOTAL CAPITAL GAIN DISTRIBUTION box 2a includes any amounts in box 2b-2d which gets different tax treatments. if box 2b-2d has no entry- report box 2a amount to 1040A line 10 or .Box 2d Collectibles (28%) gain .Box 4 FEDERAL INCOME TAX WITHHELD amount federal income tax withheld from the taxpayer's dividends in the event the payer has not been provided with he taxpayer's id number. reported on 1040A line 40

Exception to CA treatment of U.S. Treasury Obligations

. CA cannot tax on interest from U.S. Treasury obligation EXCEPT interest from .Federal National Mortgage Association (Fannie Mae) Bond .Government National Mortgage Association (Ginnie Mae) Bond . Federal Home Loan Mortgage Corporation (FHLMC)(Freddie Mac) securities Above are FULLY taxable to CA

Form 2439

. Notice to Shareholder of Undistributed Long-Term Capital Gains- looks like 1099-DIV . this form is for Capital gains that are reinvested automatically in additional shares, and reported to the taxpayer on Form 2439 rather than on form 1099-DIV.

seller-financed mortgage

. Reported on Schedule B line 1 and flow to 1040 8a . if a taxpayer sells their home to a buyer and the taxpayer finances part of all the mortgage, the taxpayer must report the buyer's name, address and ss number on Schedule B or an attachment along with interest received each year. Interest taxpayer received is taxable.

1099-DIV box 4

. reported in 1040A line 40 (federal tax withheld Form W-2 and 1099) . Federal tax withheld amount from taxpayer's dividends when taxpayer didn't provide his ID number.

U. S. Treasury Obligations

. taxable to FED but not taxable to CA . 1099-INT box 3 . Federal return 1040, 1040A line 8a . CA return Schedule CA (540) line 8 Column B (subtraction) to Form 540 line 14 CA adjustment subtraction . BY FEDERAL LAW, Interest from U.S. Treasury obligation is NEVER subject to state or local income taxes. Department of the Treasury of US offers several different types of debt instrument which accrue and pay interest at various intervals. U. S. Savings Bonds- most common Series E or EE Bonds, Series I Bonds Series H or HH Bonds Treasury Bills Treasury Notes/Bonds

Nontaxable distributions

. this amount represent a return of the shareholder's capital (original investment), generally made because an excess amount of capital has been accumulated by the corporation. .this amount may be received in cash, or reinvested at the shareholder's request to acquire additional share. .the basis of the stock must be reduced by the amount of the distribution . .amount received are not taxable until the remaining basis is reduced to 0. .usually, return of the capital is not taxable.

U.S. Savings Bonds

. when these bonds reached final maturity, they no longer yield interest. therefore, once MATURE, CASH them asap.

Tie Breaker Rule

1. 2. if parents not MFJ, parent whom the child slept more can claim: if same number of night , parent with higher AGI gets to claim 3. no parents claim child as QC, QC of higher AGI 4. parents don't claim the QC, the person who has higher AGI can claim( this person's AGI needs to be higher than the parents). If parents MFJ, the person's AGI has to be > than the parents' combined AGI /2

Qualifying Widow Test

1. Remarry? 2. a. have dependent? b. paid > 1/2 of cost of maintaining house c. dependent lived with you entire year

Head of Household Test

1. You were unmarried? 2. you paid more than 50% of year's maintenance cost of the home of qualifying person.

Qualified Dividends

1040A line 9b CA: no adjustment since this amount is included in ordinary dividends. 1099-DIV, box 1b . Use Qualified dividend and Capital Gain Tax Worksheet if taxpayer has qualified dividends and normal capital gain distributions . Schedule D and Schedula D tax Worksheet if taxpayer with other capital gains and losses . are those received on certain shares of stock held more than 60 days (90 days for preferred stock) . are treated as long-term gain and taxed at lower rates than ordinary income and short-ten capital gains. . max rate of tax 0% on 10% or 15% tax bracket 15% on 15%< tax bracket < 39.6% 20% on > 39.6% tax bracket

Federal tax-exempt interest income

1099-INT box 8 Fed - not taxed 1040A line 8b or 1040 line 8b CA - may tax OR may NOT tax. supplemental info provided by payer - Adjustment NEEDED when CA Taxes such interest Schedule CA (540) line 8 column C (Addition), then flow to Form 540 line 16, California Adjustment-Additions

distributed vs undistributed Capital Gain

DISTRIBUTED/ 1099-DIV box 2a --- 1040A line 10 or 1040 line 13 1) DISTRIBUTED capital gains (taxpayer receives 1099-DIV box 2a) are paid in cash to the shareholders, or reinvested in additional shares at the shareholders' request 2) UNDISTRIBUTED capital gains (taxpayer receives Form 2439 rather than form 1099-DIV) are retained by the investment company, which pays the tax on them. These gains are reinvested automatically in additional shares. Individual who received form 2439 may have a credit which can only be claimed by filing form 1040. . are treated as long-term capital gains regardless of how long the taxpayer has owned them.

Treasury bills, notes and bonds

Direct obligation of U.S. Treasury. . T bills mature in 1 yr or less are taxed at maturity . other treasury obligations are taxed as the interest is earned

HSA interest/dividends

FED - not Taxable CA - Taxable in the year earned.

nancy received $100 interest from the HSA/ CA textbook pg 136

FED - not taxable CA - Taxable Schedule CA 540 line 8 Column A $0 Column B $0 Column C $100

Capital Gain Distribution

Form 1099-DIV, box 2a 1040A line 10 , 1040 line 13 taxed at lower rates than ordinary income and short-term capital gains. Tax treatment of capital gain distribution 1) DISTRIBUTED capital gains (taxpayer receives 1099-DIV box 2a) are paid in cash to the shareholders, or reinvested in additional shares at the shareholders' request 2) UNDISTRIBUTED capital gains (taxpayer receives Form 2439 rather than form 1099-DIV )are retained by the investment company, which pays the tax on them. These gains are reinvested automatically in additional shares. Individual who received form 2439 may have a credit which can only be claimed by filing form 1040. are treated as long-term capital gains regardless of how long the taxpayer has owned them. . Amounts represent the shareholder's share of capital gains from mutual funds, regulated investment companies, and real estate investment trusts(REITs). . Amounts represent the shareholder's portion of gain from the sale of capital assets owned by these investment companies. . Capital gain distributions are characterised as long-term, in a mutual fund or real estate investment trust. .Capital gain distribution are taxed in the year constructively received

Series I

Issued since 1998 maturity after 30 yrs - 2028년 이후 . inflation-indexed . treated same as Series EE bonds.

Series EE bonds

Issued starting 1980 maturity after 30 yrs-2010년 이후 . interest treatment is same as Series E bonds/ report when cashed or the year of final maturity whichever is earlier. . interest reported annually- same as E bonds.

Series E bonds

Issued thru 11/30/65 maturity after 40 yrs-2005 이후 12/01/65-6/30/80 maturity after 30 yrs-2010 이후 . no longer issued . accrue interest until they mature. the interest is reported in the year the bonds is cashed or the year of final maturity whichever is earlier. . taxpayer may elect to report the interest each year as it is earned. This election is made by attachment a statement tot the tax return. Once this election is made, the taxpayer must include in income the interest from all Series E or EE bonds each year. Tye tax payer may only change back to the other method with IRS permission. . thru 8/31/2004, mature Series E or EE bonds could be traded in for Series HH bonds. Such a trade was nontaxable transaction, meaning the previously accrued interest continued to be tax-deferred until distributed.

Series H bonds

Issued thru 12/31/79 maturity after 30 yrs - 2009년 이후

Series HH bonds

Issued thru 8/31/04 maturity after 20 yrs - 2024년 이후 . pay interest directly to the taxpayer twice a year . report the interest in income in the year it is received with cash-method taxpayer.

States are

NOT allow to tax income derived from direct FEDERAL obligation

Federal government does

Not tax interest income from state or local bonds issued by any state or local government

Form 8332

Release /Revocation of Release of Claim to exemption for Child by Custodial Parent

non dividend distributions

form 1099-DIV box 3 not entered on the tax return

Municipal bonds interest is tax-exempt on federal return

it may be taxable or tax-exempt in CA depending upon the issuer of the bond

1040 vs 1040A

line 1 - line 9b Qualified dividends 까지 똑같다. line 7 Wages, salaries, tips, etc line 8a Taxable interest line 8b Tax-exempt interest line 9a Ordinary dividends line 9b Qualified dividends 1040A line 10 Capital gain distributions 1040 line 10 taxable refunds, credits, or offsets of state and local income taxes