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Interest and Dividend Income. Form 1040 Lines 8-9 Pub 4012 D-7 to 8 Pub 4491 Page 64. The Interview. A conversation. The Interview – A Conversation. Prior year’s return Forms 1099-DIV, -INT, -OID, or substitute Organize them by type

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Interest and dividend income

Interest and Dividend Income

Form 1040 Lines 8-9

Pub 4012 D-7 to 8

Pub 4491 Page 64

NTTC Training 2013


The interview
The Interview

  • A conversation

NTTC Training 2013


The interview a conversation
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 lesson

Use the correct year forms, usually 2013!

NTTC Training 2013


Limitations on scope 1099 int
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

NTTC Training 2013


Limitations on scope 1099 div
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

NTTC Training 2013


Limitations on scope 1099 int or 1099 div
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

NTTC Training 2013


Limitations on scope 1099 int or 1099 div1
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

NTTC Training 2013


Limitations on scope brokerage accounts
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

NTTC Training 2013


Limitations on scope brokerage accounts1
Limitations on Scope – Brokerage Accounts

Investment interest – where do I find it?

  • On brokerage statement, look for “other information”

  • Interest on margin is investment interest

  • If itemizing deductions, return is out of scope

  • If not itemizing deductions, can prepare return

NTTC Training 2013


Limitations on scope foreign accounts
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 correctly

  • Client would need to file their own Form FinCen114 (old TD 90-22.1)

NTTC Training 2013


Limitations on scope foreign accounts1
Limitations on Scope – Foreign Accounts

  • Bottom of Sch B – Part III

NTTC Training 2013


Limitations on scope foreign accounts2
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

NTTC Training 2013


Limitations on scope foreign accounts3
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

NTTC Training 2013


Foreign interest income case study
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?

NTTC Training 2013


Interest income what is it
Interest Income What Is It?

  • Earnings on

    • Bank, savings, and credit union deposits

    • Certificates of Deposit

    • Bonds (corporate or government)

    • Money loaned out

NTTC Training 2013


Interest income what is it1
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

NTTC Training 2013


Interest income what is it2
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)

NTTC Training 2013


Where to find interest income
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

NTTC Training 2013


Interest income
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

NTTC Training 2013


Interest income1
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

NTTC Training 2013


Interest income2
Interest Income

  • Investment expenses related to interest income

    • Deductible if itemizing deductions

    • Sch A line 23, subject to 2% threshold

      e.g. account management fee

  • More on deductions in Lesson 21

NTTC Training 2013


Interest income3
Interest Income

The Tax Form

NTTC Training 2013


Interest income4
Interest Income

The Tax Form

  • Excerpt from sample brokerage statement

NTTC Training 2013


Entering interest income
Entering Interest Income

  • Always use Interest Stmt*

  • Select in Forms Tree

    * except for seller financed interest income

NTTC Training 2013


Entering interest income1
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

NTTC Training 2013


Interest income5
Interest Income

The Input Form

  • If have many payers, alphabetize the list so it’s easier to find a payer

    • With cursor in Payer column, use Alt+F9 to sort ascending

NTTC Training 2013


Interest income6
Interest Income

The Input Form

  • Abbreviate payer name if needed

  • Determine federal tax rule first

  • Determine state tax rule second

NTTC Training 2013


Naeob code e exempt interest
NAEOB Code E Exempt interest

  • State or municipal obligations

  • Exempt interest reported by broker

  • Do not use for certain EE/I bonds used for education - out of scope

  • Enter in NAEOB amount column only (not Box 1/3)

NTTC Training 2013


Interest income7
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

NTTC Training 2013


Interest income8
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

NTTC Training 2013


Interest income9
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

NTTC Training 2013


Seller financed mortgage interest
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

NTTC Training 2013


Interest income quiz
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

NTTC Training 2013


Foreign interest income account
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

NTTC Training 2013


Dividend income what is it
Dividend Income –What is it?

  • Payment by a corporation

  • Paid to its shareholders

  • Represents a portion of the corporation’s earnings

NTTC Training 2013


Dividend income what is it1
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)

NTTC Training 2013


Dividend income what is it2
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

NTTC Training 2013


Dividend income what is it3
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

NTTC Training 2013


Where to find dividend income
Where to Find Dividend Income

  • Form 1099-DIV

  • Substitute 1099-DIV (brokerage or mutual fund statement)

  • Schedule K-1 (Lesson 15)

NTTC Training 2013


Dividend income
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

NTTC Training 2013


Capital gain distributions
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

NTTC Training 2013


Dividend income1
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

NTTC Training 2013


Dividend income2
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)

NTTC Training 2013


Dividend income3
Dividend Income

  • Reinvested dividends

    • Really, two transactions

      • Dividend income

      • Purchase of more shares

    • Payer effects both instantaneously

  • Payers keep track of basis for covered securities (always client’s responsibility)

NTTC Training 2013


Dividend income4
Dividend Income

The Tax Form

OOS

OOS

NTTC Training 2013


Dividend income5
Dividend Income

The Tax Form

  • Excerpt from sample brokerage statement

NTTC Training 2013


Dividend income 1099 div
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 distribution

NTTC Training 2013


Dividend income 1099 div1
Dividend Income 1099-DIV

  • 3 Nondividend distribution – not reported but client needs to record as decrease in basis

NTTC Training 2013


Entering dividend income
Entering Dividend Income

  • Always use Dividend Stmt

  • Select on Form Tree

NTTC Training 2013


Dividend income6
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

NTTC Training 2013


Dividend income7
Dividend Income

The Input Form

  • If have many 1099 forms, alphabetize the list so it’s easier to find a payer

    • With cursor in Payer column, use Alt+F9 to sort ascending

NTTC Training 2013


Input information as on 1099 div
Input information as on 1099-DIV

The Input Form

  • Abbreviate or truncate payer name to fit

  • Column “N” (nominee) not applicable for in-scope returns

NTTC Training 2013


Input information as on 1099 div1
Input information as on 1099-DIV

The Input Form

  • Exempt Int. Div.,

    e.g. muni bond mutual fund

    • May need state adjustment

  • PAB – careful there is no AMT – out of scope

  • State withholding?

    • Input on applicable state form

NTTC Training 2013


Dividend income8
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

NTTC Training 2013


Dividend income quiz
Dividend Income Quiz

  • Payers of dividends of less than $10 don’t have 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

NTTC Training 2013


Dividend income quiz1
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

NTTC Training 2013


Other item 1099 int or div
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 forget

NTTC Training 2013


Foreign tax on 1099 int or div
Foreign Tax on 1099-INT or DIV

  • Nonrefundable credit – 1040 Line 47

  • 1099-INT or 1099 – DIV boxes 6 & 7

  • Input now so don’t forget

  • Will be covered in Lesson 24

NTTC Training 2013


Quality review interest dividend income
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)

NTTC Training 2013


Quality review interest dividend income1
Quality Review Interest/Dividend Income

  • Compare to prior year

    • Missing accounts?

  • Foreign tax credit or deduction?

  • Miscellaneous investment expense deduction?

NTTC Training 2013


Client summary interest dividend income
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?

NTTC Training 2013


Interest and dividend income1
Interest and Dividend Income

Comments?

Questions?

NTTC Training 2013


Let s practice in taxwise
Let’s Practice In TaxWise

  • Open the return for Kent/Bryant in TaxWise

  • From Pub 4491-W, enter

    • Interest and dividend income

    • Foreign tax credit shown on forms

  • Do not enter stock sales (1099-B)

  • Verify tax liability

NTTC Training 2013


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