Learning Center
Plans & pricing Sign in
Sign Out

Reporting Unearned Income


Unearned income is any income derived from sources other than employment or self-employment.

More Info
									                                 Reporting Unearned Income

Unearned income is any income derived from sources other than employment or self-
employment, and includes the following:
    Interest and dividends.
    Pensions
    Social Security benefits.
    Unemployment benefits.
    Alimony.
    State and local tax refunds.
    Income from court award and damages.
    Cancellation of debt.

Interest Income

Interest is income earned through depositing money in savings programs, buying certificate of
deposits (CDs) or bonds, or lending money. It includes interest received from your bank
accounts, interest you received on loans you make to others, and interest from most other

Interest that you receive or which is credited to your account and can be withdrawn, is taxable in
the year it becomes available to you.

Interest earned over $10 must be reported to you on a Form 1099-INT by the financial institution
from which the interest was earned. The interest is reported to you in box 3 of Form 1099-INT.

The following rules relate to reporting interest income:
    You must report interest received of over $1,500 on Part 1 of Schedule B, Interest and
       Ordinary Dividends.
    If you have invested in CDs, which will mature after more than one year, you must
       include part of the interest as income for each year.
    If you suffered an early withdrawal penalty for withdrawing money from CDs or other
       time-deposit savings account before maturity, that penalty is reported to you in box 2 of
       Form 1099-INT. You can deduct this penalty as an adjustment to income on line 30 of
       Form 1040.
    Your distributive share of interest from partnerships or S corporations is taxable interest;
       this is reported to you on Schedule K-1.
    Interest received on the proceeds of a life insurance policy is taxable, although the
       proceeds paid to a beneficiary is generally not taxable.
    Interest you receive on tax refunds is taxable income.
    If you receive a gift for opening a bank account with a savings institution, the fair market
       value of the gift must be reported as interest in the year you received it.
    You report your taxable interest on line 8a of Form 1040. You report tax-exempt interest
       on line 8b, and this is not included as a part of your gross income.
Dividend Income

Dividends are distributions you receive from corporations, and can be in the form of money,
stock, or other property paid to you by a corporation. Dividends are reported to you on Form
1099-DIV. You may also receive dividends from a partnership, estate, trust, or an S corporation.
Dividends from these sources are reported to you on Schedule K-1.
Your broker must report dividends earned over $10 to you on a Form 1099-DIV, and you must
report dividends you receive of over $1,500 on Part II of Schedule B.

The following are the main types of dividends you might receive:
    Ordinary dividends: These are paid out of the profits of corporations, and are taxable
    Qualified dividends: These are ordinary dividends, which are taxed as capital gains.
       Qualified dividends are taxed at a maximum rate of 15% (0% for those people who are in
       a tax bracket of lower than 25%).
    Capital gain distributions: Mutual funds pass capital gains to investors as capital gain
       distributions, and these amount are taxed as capital gains. They are reported to you in box
       2a of Form 1099-DIV, and you must report them directly on line 13 of Form 1040.
    Non-dividend distributions: These represent a return of capital, and are not taxable unless
       the amount you received exceeds the amount you originally invested, in which case the
       excess would be reported as a capital gain.
    Credit union dividends: A “dividend” received from a credit union is actually interest,
       and must be reported on either Part 1 Schedule B, or line 8a of Form 1040.
    Dividend reinvestment: If you are involved in a dividend reinvestment plan, (where the
       institution allows you to use dividends to purchase additional shares instead of receiving
       the dividends in cash), you must report the dividends as income.

State or Local Income Tax Refunds.

These are reported to you on Form a1099-G, Certain Government Payments.
    If you received a state or local tax refund, you may have to report the refund as income
       on line 10 of Form 1040. You will only have to do so, however, if you itemized
       deductions in the previous year (see chapter 5), and claimed state and local taxes as an
       itemized deduction. However, to determine if the full amount of your state or local tax
       refund is actually taxable, the appropriate worksheet must be completed.
    If you took the standard deduction, or claimed the state and local general sales taxes as
       your itemized deduction, then the state or local tax refund is not taxable.

Alimony payments you receive from your spouse or former spouse are taxable to you in the year
you receive them. Alimony received is reported on line 11 of Form 1040. It is important to note
that child support payments are not alimony, and are not taxable income.

Unemployment Compensation

Any unemployment compensation received is fully taxable. If you received unemployment
compensation, it is reported to you on a Form 1099-G, and you must report it on line 19 of Form

Income from Court Awards and Damages

The following settlement amounts received by compromise or judgment must be included in
taxable income:
     Interest on any award.
     Compensation for lost wages or lost profits.
     Punitive damages.
     Amounts received in settlement of pension rights (if you did not contribute to the plan).
     Damages for patent or copyright infringement, breach of contract, of interference with
       business operations.
     Back pay and damages for emotional distress received to satisfy a claim under the Civil
       Rights Act of 1964.
     Attorney fees and court costs where the underlying recovery is included in income.

You report these items of income as Other Income on line 21 of Form 1040.
Any amounts received, as damages to compensate for a physical injury or physical illness, are
not taxable, and should not be included in taxable income.

Cancellation of Debt

A cancellation of a debt results in taxable income. When you borrowed the money you were not
required to include the loan proceeds in income because you had an obligation to repay the
lender. When that obligation is subsequently forgiven, the amount you received as loan proceeds
is reportable as income because you no longer have an obligation to repay the lender. The
forgiven amount must be reported to the IRS on a Form 1099-C, Cancellation of Debt. You
report a cancellation of debt as Other Income on line 21 of Form 1040.

Note however, that a cancellation of debt is not taxable in the case of non-recourse loans. A non-
recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the
property being financed or used as collateral. That is, the lender cannot pursue you personally in
case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in
taxable income.
Parents’ Election To Report Child’s Interest and Dividends

If all of your child’s income is in the form of interest, dividends, and capital gain distributions
(e.g., from mutual funds), and the amount is more than $1,900 but less than $9,500, you can elect
to report the child’s income on your own tax return, rather than filing a separate return for your
child. Children with investment income may have part or all of this income taxed at their
parents’ tax rate rather than at the child’s rate. In this situation, you must file Form 8814,
Parents’ Election To Report Child’s Interest and Dividends, to elect to report your child’s
income on your return. If you make this election, your child will not have to file a tax return.

You can make this election if your child meets all of the following conditions.
    The child was under age 19 (or under age 24 if a full-time student) at the end of the year.
    The child’s only income was from interest and dividends, including capital gain
      distributions and Alaska Permanent Fund dividends.
    The child’s gross income for the year was less than $9,500.
    The child is required to file a return.
    The child does not file a joint return.
    There were no estimated tax payments for the child for the year.
    There was no federal income tax withheld from the child’s income.

Gambling Winning

Gambling winnings are taxable income, and are reported to you on Form W-2G, Certain
Gambling Winnings, if:
   The winnings (not reduced by the wager) are $1,200 or more from a bingo game or slot
   The winnings (reduced by the wager) are $1,500 or more from a keno game.
   The winnings (reduced by the wager or buy-in) are more than $5,000 from a poker
   The winnings (except winnings from bingo, slot machines, keno, and poker tournaments)
      reduced, at the option of the payer, by the wager are: (a) $600 or more, and (b) at least
      300 times the amount of the wager.
   The winnings are subject to federal income tax withholding (either regular gambling
      withholding or backup withholding).

Gambling income is reported on line 21 of Form 1040. Gambling income also includes winnings
from lotteries, raffles, horse and dog races, casino winnings, as well as the fair market value of
prizes won, such as cars, houses, trips, and all other non-cash prizes.

 If you are serious about doing your own taxes, you will find these two publications to be pretty helpful:
 “How To Save Money By Ensuring That Your Tax Returns Have Been Properly Prepared” and “How To
 Use Turbo Tax To Confidently Prepare Your Tax Returns.”
Available in Kindle format and in paperback
Visit: or visit

To top