In the individual tax return (Form 1040), Schedule B is used to report interest and ordinary dividends. The following income is reported on Schedule B in Parts I and II:
- Over $1,500 in interest or ordinary dividends reported on Form 1099-INT or Form 1099-DIV.
- Interest from seller-financed mortgage if the buyer used the property as a personal residence.
- Accrued interest from a bond.
- Original Issue Discount (OID) in an amount less than the amount shown on Form 1099-OID.
- Interest income reduced by the amount of amortizable bond premium.
- Interest from series EE or I U.S. savings bonds issued after 1989.
- Interest or ordinary dividends received as a nominee.
Additionally, the taxpayer must answer the Yes/No questions in Part III if any of the following are true:
- They had over $1,500 of taxable interest or ordinary dividends;
- They had a foreign account; or
- They received a distribution from, or were a grantor of, or a transferor to, a foreign trust.
Regular Interest
Interest Amount - Shows taxable interest paid. This does not include tax-exempt interest reported in box 3.
Early Withdrawal Penalty - The amount in box 2 shows the interest or principal forfeited because of early withdrawal of time savings. If an amount in box 2 of the Form 1099-INT is present, enter the amount on this line. This amount is carried as an adjustment to Form 1040, Penalty on Early Withdrawal of Savings.
Taxable US Savings Bond Interest - The amount in box 3 shows interest on U.S Savings Bonds, Treasury bills, Treasury bonds, and Treasury notes. This amount may or may not all be taxable. Any amount that is determined to be taxable should be entered on this line.
Federal Income Tax Withheld - Box 4 shows federal tax withholdings. This amount carries to the payments section of Form 1040.
State Exempt Interest - If the interest is exempt from state taxes, include the exempt interest amount and the 2-letter state abbreviation. If you are unsure whether this amount is tax exempt in the state, refer to the instructions for the state.
Nominee Interest
- Report the Form 1099-INT on Schedule B.
- After the last entry on line 1, enter a subtotal of all interest. Below the subtotal enter 'Nominee Distribution' and list the total interest received as a nominee as a negative amount.
- Subtract the nominee interest from the subtotal and enter the result on line 2.
- The taxpayer must issue a Form 1099-INT for the nominee amount unless the owner of the income is taxpayer's spouse. List the taxpayer as payer and the owner as recipient. The taxpayer must file both Form 1099-INT and Form 1096 with the IRS.
Original Issue Discount (OID) Adjustment
OID is a form of interest. It is the excess of a debt instrument's stated redemption price at a maturity over its issue price (acquisition price for a stripped bond or coupon). Generally OID is included in income as it accrues over the term of the debt instrument, whether or not the taxpayer receives any interest payments from the issuer.
Obligations that may have OID include debt instruments such as a bond, note, debenture, or other evidence of indebtedness having a term of more than one year.
In most cases, the entire amounts in boxes 1 and 2 of Form 1099-OID must be reported as interest income. See Publication 1212 for details on refiguring OID.
Accrued Interest
- Seller - If a bond is sold between interest payment dates, part of the sales price represents interest accrued to the date of sale. A taxpayer who sells the bond must report the accrued interest portion of the sales price as interest income in the year of the sale.
- Buyer - If a bond is purchased between interest payment dates, part of the sales price represents interest accrued before the date of purchase. A taxpayer who buys the bond treats the accrued interest portion of the purchase price as a return of capital by reducing basis in the bond. Interest reported on Form 1099-INT that includes interest accrued before the date of purchase should be listed in full on Schedule B. Then, subtract the amount of 'Accrued Interest' from the subtotal of all interest income received.
Amortizable Bond Premium (ABP) Adjustment
If a taxpayer pays a premium to buy a bond, the premium is part of the taxpayer's basis in the bond. If the bond yields taxable interest, they can elect to amortize the premium. This generally means that each year, over the life of the bond, part of the premium is used to reduce the amount of interest includible in income. If the taxpayer makes this choice, they must reduce their basis in the bond by the amortization for the year. See Publication 550. If the bond yields tax-exempt interest, the taxpayer must amortize the premium. The amount is used to reduce the amount of tax-exempt interest reported on line 8b, Form 1040, and also reduces the taxpayer's basis in the bond.
Accrued Market Discount
- Ratable accrual method - Treat the market discount as accruing in equal daily installments during the period the taxpayer holds the bond. Figure the daily installments by dividing the market discount by the number of days after the date the bond was acquired, up to and including its maturity date. Multiply the daily installments by the number of days the bond was held to figure the accrued market discount.
- Constant yield method - Instead of using the ratable accrual method, the accrued discount can be figured using a constant interest rate (the constant yield method). The taxpayer makes this choice by attaching to their timely filed return a statement identifying the bond and stating that they are making a constant interest rate election. The choice takes effect on the date the bond was acquired. Once this election is made for a bond, it cannot be changed.
Tax-Exempt Interest
Tax-exempt interest is required to be reported on the tax return but it is not taxable. The amount is reported on Form 1040, but is not included in Total Income.
Dividends
Two types of dividends are reported on Form 1099-DIV: ordinary dividends and qualified dividends.
Qualified dividends are part of ordinary dividends but are reported separately on Form 1099-DIV as they are taxed at capital gains tax rates rather than ordinary rates. On Form 1040, qualified dividends are also stated separately and not included in Total Income or AGI.
Nominee Dividends are dividends that the taxpayer received on behalf of another person. If the taxpayer's name and SSN are on a brokerage account, but some or all of the stock belongs to someone else, the taxpayer must file Form 1099-DIV and the other person must report the dividends on his or her own tax return. The taxpayer then reports a nominee dividend adjustment to reduce their taxable dividends.
While exempt-interest dividends are not subject to federal income tax, they may still be subject to state income tax or the Alternative Minimum Tax (AMT). Even though tax-exempt, the dividend income must be reported on the income tax return. Mutual funds report exempt-interest dividends on Form 1099-INT.
Seller Financed Interest
Interest received from a seller-financed mortgage (if the buyer uses the property as a personal residence) should be listed on Schedule B. Report the buyer's name, address, and SSN.
Part III
If total interest less excludable interest on series EE and I U.S. savings bonds issued after 1989 is greater than $1,500, or if total dividends are greater than $1,500, the Yes/No questions in Schedule B Part III must be answered. See the Schedule B instructions for more information about these questions.
Note: This is a brief guide on interest and dividends reported on Schedule B. This is not intended as tax advice.
Additional Information: