TAX-AIDE
TAX-AIDE
Interest and Dividend Income
Form 1040 Lines 8-9Pub 4012 D-7 to 8Pub 4491 Page 64
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The Interview – A Conversation
●Prior year’s return
● Forms 1099-DIV, -INT, -OID, or substitute Organize them by type If many, alphabetize for easier input and
easier for quality review
● Forms K-1 (limited) – see K-1 lessonUse the correct year forms, usually 2013!
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Limitations on Scope – 1099-INT
●Any of these codes needed on the Interest Statement? N – Nominee A – Accrued Interest O – Original issue discount adjustment B – Bond premium amortization
adjustment
●Only “E” – exempt interest is in scope
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Limitations on Scope – 1099-DIV
Review Forms 1099-DIV for out-of-scope: Box 2c Sec. 1202 gain
(small business stock)
Boxes 8 or 9 – Liquidating distributions
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Limitations on Scope – 1099-INT or 1099-DIV
Would Alternative Minimum Tax be generated? (out-of-scope)
●Look for PAB amounts 1099-INT box 9 1099-DIV box 11
●Advise client that if AMT applies, cannot prepare return
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Limitations on Scope – 1099-INT or 1099-DIV
Would there be any Net Investment Income Tax? (out-of-scope)
●Applies only if Adjusted Gross Income is more than:
MFJ or QW: $250,000 MFS: $125,000 Single or HoH: $200,000
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Limitations on Scope – Brokerage Accounts
Investment interest expense – what is it?
●Interest paid on borrowings to purchase or carry investments
●Possibly deductible on Sch A, but requires Form 4952
●Form 4952 is out of scope
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Limitations on Scope – Brokerage Accounts
Investment interest expense– where do I find it?●On brokerage statement, look for “other information”●Interest on margin is investment interestIf itemizing deductions, return is out of scopeIf not itemizing deductions, can prepare return
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Limitations on Scope – Foreign Accounts
Additional required reporting ●Foreign Bank or Financial Accts
At any time during the year the value of all reportable accounts is more than $10,000
●Return can be in scope●Sch B Part III questions must be answered correctlyClient would need to file their own Form FinCen 114 (old TD 90-22.1)
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Limitations on Scope – Foreign Accounts
Additional required reporting
●Foreign trusts and foreign gifts
●Return can be in scope
●Sch B Part III questions must be answered correctly
Client would need to file their own Form 3520
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Limitations on Scope – Foreign Accounts
Additional required reporting●Specified Foreign Financial Assets●If the value of all reportable assets exceeds
$75,000 ($150,000 MFJ) at any time during the year OR
$50,000 ($100,000 MFJ) at the end of the year
Return is out of scope – we cannot prepare Form 8938
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Foreign Interest IncomeCase Study
●Case study: Client has statement from DeutscheBank showing interest income from a EuroAccount deposit
● Statement shows U.S. $ and Euros €
●What should you do?
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Interest Income What Is It?
●Earnings on Bank, savings, and credit union deposits Certificates of Deposit Bonds (corporate or government) Money loaned out
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Interest Income – What Is It?
● It is not earned income Money, not a person, is earning the
income
●Reported in year earned Usually when posted to account
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Interest Income – What Is It?
●Bonds can be purchased at a discount or with a premium The discount is additional interest income The premium is a reduction of interest
income
●Both amortized over the life of the bond
Payer does the math (we cannot)
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Where to Find Interest Income
● Form 1099-INT
● Substitute 1099-INT (e.g. brokerage stmt)
● Schedule K-1 (see K-1 lesson)
● No tax form from payer Seller financed mortgage interest income Private or foreign payer Interest less than $10
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Interest Income
●Whether or not reported by the payer on a tax form, all interest must be included in the return Taxable
OR Exempt Other calculations can be impacted
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Interest Income
● All interest is taxable except interest from State or municipal obligations, includes
D.C. U.S. possessions See Pub 4491 page 65 for others
● U.S. obligations (T-Bills, Savings Bonds, etc.) are fully taxable for federal tax*
*may be exempt from state tax
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Interest Income
● Excerpt from sample brokerage statement
The Tax Form
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Entering Interest Income
●Always use Interest Stmt*
● Select in Forms Tree
* except for seller financed interest income
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Entering Interest Income
● Interest Stmt not on tree? (use link-link method)Link from 1040, line 8a to Sch B Link from Sch B, line 1b to Interest Stmt
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Interest Income
●Abbreviate payer name if needed
●Determine federal tax rule first
●Determine state tax rule second
The Input Form
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NAEOB Code E – Exempt interest ● State or municipal obligations●Exempt interest reported by brokerDo not use for certain EE/I bonds used
for education – out of scope●Enter in NAEOB amount column only
(not Box 1/3)
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Interest Income
Enter other amounts as shown on tax form
●AMT PAB – private activity bond interest
●Early (withdrawal) penalty TW carries to 1040 line 30
●Federal (tax) withheld
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Interest Income
Enter other amounts as shown on tax form
●Foreign tax credit – see Lesson 24 Input now so don’t forget
●State tax withheld Input now on appropriate state form so
don’t forget
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Interest Income
●Complete one 1099-INT at a time
● Input all information on the form
● If brokerage statement, input all information on the brokerage statement
Too easy to miss items if try to go back to a form a second time
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Seller-financed Mortgage Interest
●Enter in Sch B top portion● Link from first Sch B if need more forms●Must have payer ID number to e-file
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Interest Income Quiz
Is interest taxable on federal return?
●New York City bond interest?
●Treasury bill interest?
●Ford Motor Co bond interest?
●Interest on loan to cousin Charlie?
No
Yes
Yes
Yes
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Foreign Interest Income/Account?
●Must ask and answer questions at bottom of Sch B Foreign account/signature authority Foreign trust
● If answer is “yes” to either, additional reporting may be required
Remind client of additional filing responsibility
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Dividend Income –What is it?
●Payment by a corporation
●Paid to its shareholders
●Represents a portion of the corporation’s earnings
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Dividend Income –What is it?
●Mutual funds* invest in (buy) Stock of corporations Bonds issued by private or government
entities Other investments
*Includes ETFs (exchange traded funds)
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Dividend Income –What is it?
●Mutual funds “pay” to their investors Dividends from the fund’s income
Dividend income from corporations Interest income from bonds/accounts
Capital gain distributions from capital transactions that the fund makes
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Dividend Income –What is it?
●Mutual fund dividends Dividend income from corporations
Will be identified as ordinary/qualified Interest income from bonds/accounts
Will be identified as exempt if from exempt securities, e.g. state bonds
But both are still dividends to the fund’s shareholders
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Where to Find Dividend Income
● Form 1099-DIV
● Substitute 1099-DIV (brokerage or mutual fund statement)
● Schedule K-1 (Lesson 15)
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Dividend Income
●Ordinary dividend income, not qualified Taxed at regular tax rates
●Qualified dividend income Taxed at capital gain rates
1099 ordinary box 1a will always be greater than or equal to qualified box 1b
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Capital Gain Distributions
●They come from a mutual fund
●They’re long term
●Taxed at capital gain rates
Capital gain distributions from a muni fund are not “interest” and are not exempt
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Dividend Income
●Capital gain shown on K-1 Not the same as a capital gain
distribution Do not input on Dividend Stmt
Will be covered in K-1 Lesson 15
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Dividend Income
●Nondividend distributions Return of basis (cost) Basis in the paying security is reduced by
the amount of nondividend distribution
Payers keep track of basis for covered securities (always client’s responsibility)
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Dividend Income
●Reinvested dividends Really, two transactions
Dividend incomePurchase of more shares
Payer effects both instantaneously
Payers keep track of basis for covered securities (always client’s responsibility)
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Dividend Income
● Excerpt from sample brokerage statement
The Tax Form
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Dividend Income 1099-DIV
●1a Ordinary dividends 1b Qualified dividends – a subset of
ordinary dividends
●2a Capital gain distributions 2b §1250 gain – a subset of capital gain
distribution 2d 28% gain – a subset of capital gain
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Dividend Income 1099-DIV
●3 Nondividend distribution – not reported on tax return but client needs to record as decrease in basis
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Entering Dividend Income
●Always use Dividend Stmt
● Select on Form Tree
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Dividend Income
●Dividend Stmt not on tree? (use link-link method)Link from 1040, line 9a to Sch B Link from Sch B, line 5a to Dividend Stmt
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Input information as on 1099-DIV
●Abbreviate or truncate payer name to fit
●Column “N” (nominee) not applicable for in-scope returns
The Input Form
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Input information as on 1099-DIV
●Exempt Int. Div., e.g. muni bond mutual fundMay need state adjustment
●PAB – careful there is no AMT – out of scope
● State withholding? Input on applicable state form
The Input Form
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Dividend Income
●Complete one 1099-DIV at a time
● Input all information on the form
● If brokerage statement, input all information on the brokerage statement
Too easy to miss items if try to go back to a form a second time
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Dividend Income Quiz
●Payers of dividends of less than $10 don’t have to issue 1099 (true or false?) True – same rule as for interest payers
●Taxpayers don’t have to report dividends if they don’t get a 1099 form (true or false?) False – all income must be reported on
the tax return
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Dividend Income Quiz
●Dividends reinvested in more shares are not taxable (true or false)? False – the dividend income is the first
transaction and the purchase of shares is a second transaction
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Other Item: 1099-INT or -DIV
● Investment expenses 1099-INT box 5 1099-DIV box 5
●Possible itemized deduction Schedule A, Line 23 Subject to 2% of AGI threshold
Input now so don’t forgetMore to be covered in Lesson 21
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Foreign Tax on 1099-INT or DIV
● Nonrefundable credit
● 1099-INT or 1099 – DIV boxes 6 & 7
Input now on Form 1116 so don’t forgetWill be covered in Lesson 24
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Quality ReviewInterest/Dividend Income
●Check I&I – was interest/dividend box checked?
●Verify interest or dividend income isinput correctly
● State adjustments?
●Delete unused rows on Interest/ Dividend Stmt (unless still own security)
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Quality Review Interest/Dividend Income
●Compare to prior year Missing accounts?
● Foreign tax credit or deduction?
●Miscellaneous investment expense deduction?
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Client Summary Interest/Dividend Income
When done with return, revisit
●Balance due too high? Increase withholding? Estimated tax payments?
●Foreign accounts, trust, gifts? Does client have additional filing
responsibilities?
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