Interest and Dividends
Common sources of Taxable Interest:
checking and savings accounts, certificates of deposit
U.S. government bonds
interest on insurance proceeds
loans that the taxpayer makes to others.
Ask the taxpayer to supply all Forms 1099-INT from
institutions that pay interest.
If the taxpayer cashed in Series EE or Series I bonds,
they should have a form 1099-INT from the bank.
Most taxpayers don’t report savings bond interest as it
accrues every year.
They report the total interest when they cash the bonds.
If the taxpayer says they have been reporting the interest
as it accrues each year, see Publication 17 under Interest
Income for directions to report the current year interest.
Interest on a Roth IRA is generally not taxable.
Interest on a traditional IRA is tax-deferred. Do not
include that interest until the taxpayer makes
withdrawals from the IRA.
The taxpayer will be issued Form 1099-R to report a
state and local bonds
qualified Series EE and Series I savings bonds used to pay
higher education expenses
interest earned on a traditional IRA
Tax-deferred till they receive distributions
Although tax-exempt interest is not taxable, the taxpayer must
report all tax-exempt interest on Form 1040 (line 8b)
Certain types of interest are exempt from federal income tax.
However, they may be taxable by the state. Sometimes the
reverse is true.
Box 1 of Form 1099-INT shows taxable interest income
received from the payer. Add the taxable interest earned
from all the taxpayer's Forms 1099-INT, and report the
total on line 8a of Form 1040.
Box 3 shows taxable interest on U.S. Savings Bonds and
Treasury obligations. Include the taxable portion with
other amounts reported on line 8a of Form 1040.
Early Withdrawal Penalty
If a taxpayer withdrew funds from a time deposit before an
account's maturity date and incurs an interest penalty, the penalty
is shown in box 2 of Form 1099-INT.
The early withdrawal penalty is entered as an adjustment to income.
Some Forms 1099-INT have entries in box 4 indicating that federal
income tax has been withheld from the interest paid. The amount
shown in box 4 goes in the Payments section for Form 1040 and the
amount shown in box 6 goes in the Credits section.
If any other boxes contain amounts, refer the taxpayer to a
professional tax preparer.
Mr. and Mrs. Wharton received $200 in interest from
bonds issued by the State of Illinois. How should they
report this on their 1040A?
a. On line 8a
b. On both lines 8a and 8b
c. On line 8b
d. They do not have to report it
Must complete Schedule B, if the taxpayer has the
Over $1,500 of taxable interest
Received, as a nominee, interest that actually belongs to
Received interest from a seller-financed mortgage, and the
buyer used the property as a home
A distribution from a foreign trust or foreign bank account
Educational savings bond exclusion
Randy and Ann have three Forms 1099-INT:
National Bank, $62
Epping Credit Union, $178
Savings and Loan, $760How much interest income
should they report on Schedule B (Form 1040A)?
Corporations make several types of distributions to their
Although most dividends are paid in cash, others are
paid in property, services, or additional shares of stock.
Most corporations use Form 1099-DIV to report
distributions to shareholders.
The corporate distributions that VITA/TCE tax
preparers may handle are:
Capital gain distributions
Nontaxable dividends and distributions
Qualified dividends are ordinary dividends that are
eligible for a lower tax rate than other ordinary income.
They are shown in box 1b of Form 1099-DIV.
Taxpayers who have questions about why a dividend is
"qualified" or "not qualified," should contact the
company that issued the dividend.
Ordinary dividends are corporate distributions paid in
cash, as opposed to property, services, or stock shares.
They come from a corporation's net earnings and profits.
Capital gain distributions come from mutual funds and
real estate investment trusts (REITs). These distributions
are treated as long-term capital gains, regardless of how
long the taxpayer holds the shares.
Distributions associated with the sale of stock or mutual
funds are detailed in the Advanced course.
Ordinary dividends are shown in box 1. Add the box 1
amounts from all the Forms 1099-DIV the taxpayer
If the taxpayer is married and the total for both spouses
is:$1,500 or less, enter the total on line 9a of Form 1040
Over $1,500, complete Form 1040, Schedule B, Part II