reporting dividend income
Schedule B: box-by-box
If your investments really paid off last year, the Internal Revenue Service wants to know. And depending on just how much you earned from your savings accounts, stocks and bonds, certificates of deposit or mutual funds, you might have to report that income on Schedule B. (If you received a form printed by the IRS, you'll find Schedule B on the back of Schedule A.)
Thanks to an increase in the reporting requirements, fewer filers have to fill out Schedule B . Previously, you had to fill it out when you had interest income of more than $400; the same was true for $400 or more in dividend income from your stocks or mutual funds. Now you don't have to send Schedule B with your taxes if your interest and dividend earnings are $1,500 or less. You can just put the amounts directly on your 1040.
This new earnings limit is applied separately to interest and dividend income. So if you received only $500 in interest and your stocks paid $1,200 in dividends, you don't have to file Schedule B even though your investment income total comes to $1,700. But if either category alone exceeds the $1,500 threshold, you must report the amount on the form's appropriate line and send it to the IRS.
Of course, to see if you need to file Schedule B, you'll have to tote up the amounts from all your 1099-INT and 1099-DIV forms. Since Schedule B is designed for this information, why not go ahead and use it? But don't file it with your 1040; simply keep it as part of your personal tax records.
And the IRS still requires you file Schedule B if any of the following apply to you:
- You sold your home or other property, provided seller financing and the buyer used it as a personal residence.
- You received interest or dividends as a nominee, that is, the earnings are in your name but they actually belong to someone else.
- You received a Form 1099 for interest as a purchaser of a bond with accrued interest.
- You received a Form 1099-INT for tax-exempt interest.
- You had a foreign account or received a distribution from a foreign account.
Now that you've determined that you must complete Schedule B, let's get to it. It begins the same way as most IRS forms. First, enter your name and Social Security number.
Now we go to the meat of the form: reporting your unearned income.
Part I, Interest
Most or all of your interest income earned will be reported on 1099-INT forms. You and the IRS each get copies from your bank or other financial institutions, so it's important that you report all your interest income in Part I. If you don't, you can bet that a tax examiner will come to you with questions about the oversight.
List each payer and the amounts received on line 1, which actually is several lines to give you plenty of room to list all your interest-paying accounts. If you sold your home or other property, provided seller financing and the buyer used the property as a personal residence, your first entry on line 1 should be the interest amount earned from that transaction. Don't forget to include the buyer's name, address and Social Security number.
Following that interest entry, list all your other interest-bearing accounts in the line 1 section, along with amounts you received. If you need more space, attach a separate page with the details.
Line 1 is also where you would report any nominee interest you got. You're a nominee on an account if it's in your name, but the interest actually belongs to someone else. Don't worry. You'll be able to eliminate this nominee interest from your tax calculations in a moment.
But if you pass that money along to its rightful -- and taxable -- owner, why do you have to report it on Schedule B? Because the interest earning account is in your name and tax ID. The IRS already has a copy of the nominee money you got and if you don't account for it when you file your tax return, you'll hear from the IRS. That's why when you do distribute this interest, you must give the actual owner a Form 1099-INT and let the IRS know you transferred the money by filing a Form 1096.
After you've entered all your interest (including nominee amounts) subtotal it, still within the line 1 area.
Below this subtotal, write "Nominee Distribution" and show the total interest you received as a nominee. Then subtract this amount from the subtotal.
If you received any tax-exempt interest (again, it should be noted on the 1099 statement you received), follow the rules for nominee interest. In this case, identify the amount to be subtracted as "Tax-Exempt Interest." And don't forget to include this tax-exempt interest on your Form 1040, line 8b.
OK, you've got all your various interest amounts entered, with the portions not taxable to you subtotaled and subtracted. Now enter the final interest income that you are responsible for on line 2.
Savings bond interest
Some interest is not taxable, but the IRS still wants to know about it on line 3. This is the case for series EE or I savings bonds that were issued after 1989.
If you used these bond proceeds to pay qualified higher education expenses for yourself, your spouse or your dependents then you may be able to exclude part or all of the interest those bonds earned. You'll need to fill out Form 8815 and then transfer the amount of bond interest you don't have to pay taxes on to line 3 here. (Don't forget to attach Form 8815 to your 1040 when you file.)
Then subtract line 3 from line 2. This amount, your taxable interest income, goes on Schedule B's line 4 and also on line 8a of your 1040. If interest is the extent of your unearned income, you're through with Schedule B.
But if you also got dividend income, move on to Part II.
Part II, Ordinary Dividends
As with interest income, you must file Schedule B if you received more than $1,500 in ordinary dividends. Dividend earnings are from your mutual fund accounts or individual stock holdings and are reported to you on 1099-DIV statements. These amounts (which also are copied to the IRS so be thorough) go on Part II of the schedule.
On line 5 (multiple lines like the form's interest counterpart), enter your dividend sources and amounts. Again, if you need more space, attach a separate sheet with the pertinent information.
The rules for reporting dividends you received as a nominee are the same as for nominee interest payments. Once you've entered all your dividend income and subtracted out any nominee dividends, enter the result on line 6.
Also put the line 6 amount on line 9a of your Form 1040.
Part III, Foreign Investment Income
Because of concerns about potentially abusive tax shelters in other countries, the IRS wants to know about your foreign investing. That's the reason for Part III, foreign accounts and trusts. And since tax shelters tend to be used primarily by people with lots of investment income, the IRS wants you to complete this section if you reported more than $1,500 in either Part I or II.
Line 7a is straightforward. Basically, if you had a foreign account, check "Yes9quot; here. Even if you did have such an account, the IRS says you can check "No9quot; if the average balance in the account was less than $10,000 during the whole year.
If you do answer "Yes9quot; to 7a, then you'll also have to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, by June 30. And you must put the name of the foreign country where the account is located on line 7b.
Line 8 wants to know if you were financially involved in a foreign trust account. In this case, loans from such a trust count as a distribution so you must check "Yes9quot; here. If so, you also have to complete Form 3520 or Form 926.
If you have a lot of foreign accounts, you probably also have a tax adviser and accountant to take care of your affairs. These professionals will explain any additional forms you need for Part III, as well as what they entered in Parts I and II, when you go to sign your tax return.
The great majority of us who file Schedule B, however, don't have to worry about Part III complexities. We simply have to report our interest or dividend income on this one-page form.
Michele Erbrick assisted with this report.
How to Report Dividends From a Partnership Stock on a Tax Return
Partners share income.
Hemera Technologies/AbleStock.com/Getty Images
A partnership is an association of two or more people that pursues some business or financial operation and divides profits among its members. Partnerships are different from C corporations, in that they do not pay taxes. Rather, partners pay the partnership's taxes on their individual returns. Partnerships report income, expenses, credits and dividends on Internal Revenue Service Schedule K-1.
Partnerships don’t issue stock and don’t pay dividends. Both of these activities are reserved for corporations. However, a partnership can make income that it distributes to its partners. Distributions resemble dividends in several ways: They are normally cash payments and may be issued periodically throughout the year. However, they don’t qualify for special tax rates and are treated as ordinary income. Partners report their shares of income, whether or not it’s actually been distributed. Schedule K-1 reports each partner’s share of income. A partner uses this information to complete Schedule E Part II of Form 1040.
Schedule E reports passive and active income from partnerships separately. In general, a partner’s income is passive if she doesn't help run the partnership. The distinction is important because active partners pay self-employment tax on their shares of partnership income, but passive partners don’t. Self-employment tax helps pay for Social Security and Medicare. Partners also report passive and active losses separately on Schedule E. Even though partnerships don’t pay taxes, the partners still file tax returns, using Form 1065.
Partnerships may hold property, including stock investments. Partnerships distribute the dividends received on stock holdings to partners. Qualified dividends stem from U.S. corporations that pay taxes on income and from qualified foreign corporations. These dividends are taxed at long-term capital gains rates. Nonqualified dividends count as ordinary income, taxed at the partners’ marginal rates. Schedule K-1 reports qualified and nonqualified dividends. Partners report these dividends directly on Form 1040.
C corporations distribute dividends democratically: The more shares you own, the bigger your dividend check. Partnerships operate under an agreement drawn by the partners that may be anything but democratic; there need not be any direct relationship between a partner’s investment and that partner’s share of income and dividends. Certain partners may receive guaranteed payments whether or not the partnership makes a profit. Schedule K-1 expresses the financial results of a partnership agreement. Specialized partnership structures, such as limited liability corporations and master limited partnerships, also use Schedule K-1 to report income and dividends.
reporting dividend income
Did your investments do well in 2005? If so, congratulations! But now the time has come to pay the piper (read IRS). There are taxes to be paid on those earnings.
However, there's good news on that front. You can still reap the benefits of the Jobs and Growth Tax Relief Reconciliation Act of 2003, which lowered the long-term capital gains rate to 15 percent on investments you've held for more than one year (it's 5 percent for taxpayers in the lowest tax brackets). We describe other beneficial changes below.
The main types of investment earnings are appreciation, dividends, and interest. Appreciation is an investment's growth in value due to market conditions. When you sell an investment that has appreciated, you pay tax on the increase in value since the date of the purchase. The rate that applies depends on how long you've held the investment. If you've owned it for more than a year, the appreciation is considered a long-term capital gain, and the rate is 15 percent. If you've owned the investment for one year or less, it's taxed at ordinary income rates.
Dividends are another form of earnings. You can receive them from a corporation as a stockholder, or passed through from a partnership, an estate, or a trust. Most corporations use Form 1099-DIV to report dividends. Dividends from a partnership are reported on Schedule K-1 (Form 1065), while dividends from a subchapter S corporation are reported on Schedule K-1 (Form 1120S). You must include all these on your tax return and pay tax on them all.
This is where additional good news comes in. The 2003 law also made a distinction between ordinary dividends, which are taxed as ordinary income, and "qualified dividends," which are taxed at the same favorable rates as long-term capital gains. In order to get the favorable lower rate, you must have held the stock on which you receive the dividend for at least 60 days.
So how do you tell which kind of dividend income you have? On Form 1099-DIV, ordinary dividends will be shown in box 1a, and qualified dividends in box 1b. On Schedule K-1 (Form 1065), ordinary dividends are on line 6a and qualified dividends on line 6b. On Schedule K-1 (Form 1120S), ordinary dividends are on line 5a and qualified dividends on line 5b. If you're a shareholder in an S corporation or C corporation for your practice, dividends or distributions from these corporations are not qualified. However, if the corporation holds onto investments that produce qualified dividends, they can be passed along to the shareholders.
What about earnings from other investments?
- Interest is taxable as ordinary income, and that leads to a tricky item. You may receive payments from savings banks and credit unions that are called "dividends," but they don't qualify for the lower rate. These earnings are taxable as ordinary income.
- Mutual funds are able to pass through qualified dividends to you, which are eligible for the favorable rate. But interest or short-term capital gains that are distributed to you by a mutual fund don't qualify for favorable treatment.
- The interest you receive from bank accounts and loans you've made to other people is taxable as ordinary income.
- Interest income from Treasury bills, notes, or bonds is subject to federal income tax, but exempt from all state and local income taxes. With a Treasury bill, the interest income is the difference between the discounted price you paid for the investment and the face value you receive at maturity. You report the interest income when the bill is paid at maturity. Both Treasury notes and bonds generally pay interest every six months. This interest is reported for the year paid.
- The interest on zero coupon bonds or any original issue discount debt instrument (the interest is the difference between the issue price and its stated redemption price at maturity) is includable in your income as it accrues over time, whether or not you receive any payments from the issuer. It's taxed at ordinary income rates.
New laws and rules
The 15 percent rate on long-term capital gains and dividends is available only through 2008. If Congress doesn't make this rate permanent, the top capital gains tax rate on long-term investments will revert to 20 percent on Jan. 1, 2009. If you have appreciated assets that you've held for more than a year, you might think about selling them in order to take advantage of the current low rate. Of course, before you decide, you'll need to compare the prospective tax savings to the investment's potential for future appreciation.
Make sure that you report qualified and ordinary dividends correctly. Only qualified dividends are eligible for the favorable 15 percent tax rate. Carefully examine your 1099s to see how they break down taxable distributions as long-term capital gains, short-term capital gains, or interest. If you have capital losses, they're fully deductible against capital gains on Schedule D, and if losses exceed gains, up to $3,000 of the excess is deductible from ordinary income on Form 1040. If you have net losses over $3,000, you can carry the losses forward to future years.
Another area that requires extra care is tax-exempt bonds. Most people assume there's no federal tax on the interest, and that's true in most cases. However, if you're subject to the alternative minimum tax, your accountant needs to take a close look at your bonds. If you own certain tax-exempt private activity bonds (such as qualified veterans' mortgage bonds) that were issued after Aug. 7, 1986, the interest is excluded from income for regular tax purposes, but it's subject to tax under the AMT.
You'll receive various 1099s reporting your dividends and interest income. Don't attach them to your return. Keep them in a safe place with your tax records. You'll be glad you did if you ever need to prove the qualified status of dividends or to prove that you have tax-exempt interest.
There's a special election you can use that allows you to treat some qualified dividends as ordinary investment income. The election is made on Form 4952. Now, why on earth would you volunteer to be taxed at a higher rate? To get a deduction for investment interest expense that may not otherwise be available to you.
If you're interested, here's how it works. Many doctors have borrowed money to invest, perhaps through a margin account with a brokerage firm. The interest charged on this type of loan is called "investment interest expense," and it's deductible only up to the amount of your net investment income. So if a doctor paid $10,000 in interest expense last year, and her interest and ordinary dividend income was only $6,000, she can deduct only $6,000. The remaining $4,000 deduction gets carried forward to future years' tax returns.
But if she has $4,000 of qualified dividends, she can opt to have them taxed as ordinary dividends. They'll be taxed at her higher ordinary income rate, instead of at the 15 percent rate, but now the entire $10,000 of interest expense will be fully deductible. She'll have to ask her accountant to crunch the numbers for her particular case, but even after factoring in the higher tax she'll pay on the dividends, this maneuver could end up reducing her net tax.
July Dividend Income from YOU the Bloggers!
July dividend income figures may not pack the same punch and dollar amounts that June has to offer, but that doesn’t mean that we all weren’t making moves and CRUSHING IT during July. Almost every dividend income report we read during the month saw some form of major progress, personal records, or discussed how movers were made to increase future dividend income! To echo the point we made last month, we are doing everything we can to get through as many dividend income articles as we can each month. If you aren’t included in our monthly summary, it doesn’t mean we didn’t read your article and your exclusion is definitely not personal. It is just a time thing! With that being said, it is time to check out our July Dividend Income summary from all of YOU in the dividend growth investing community.
Captain Dividend – $322.88 – Killing it! Looks like we (Lanny) crossed the $300 mark together this month, with a lot of the same names in Philip Morris (PM) Kraft (KHC) and Glaxo (GSK). Keep the snowball a rolling!
Zero to Zeroes – $95.49. – Woah, almost crossing the $100 mark. One tidbit of the article stood out to me and had me really excited. The fact that Alex surpassed the 2015 dividends received total this month. That’s nuts! Best part is you still have five more months to keep on building and increase your personal record that much more. CONGRATS!
Dividend Vet – $113.64 – Just a tiny 20% dividend growth rate compared to the same month last year. Heck yeah! I love the list of rock solid companies that paid a visit to the Vet this month…KO, PM, KMB, and O just to name a few. Now that is a great list of companies, why do I (Bert) only own one of them?? haha
Tawcan – $1,066.97 – Another four digit month, man you are killing it Tawcan! It is very impressive, especially considering the fact that the first month of the quarter is typically the slowest. Great work as always Tawcan! P.S. Love getting to see a funny Dilbert image every month when we open your income article up.
Divhut – $373.48 – This one is personal. Keith was getting on my (Bert) case about my use of “boring” during my monthly dividend income article . I never said boring was a bad thing Keith! Boring Dividend Investing = Happy Dividend Investing. Enjoy the rest of your gold coast trip!
Dividend for Starters – $46.46 – How would you feel about receiving a 204% raise compared to last year? Why don’t you tell us DfS. HOLY SMOKES that is an awesome dividend growth rate. Nice job DfS!!
New to Dividends – $211.46 – Another impressive dividend increase…179% compared to last year. The best part was the jump from double digit dividend income to over $200. Plus, you received dividends from quite the strong group of companies.
Pollies Dividend – € 587.68 ($ 656.92) – I would definitely say that you received a “super dividend” from one of your companies. Man are we jealous that you received that from your company and trust us, we remember that feeling from last July when we received the special Kraft-Heinz dividend! Even without the special dividend, Pollie showed a great 29% dividend growth rate compared to last year.
Dividends Down Under – $7.46 – getting paid, here we go! Everything counts and owning 2 more shares of a company via dividend re-investment is just awesome and helps push the income forward. Keep it going!
My Dividend Pipeline – $0 – I put this not because it is $0, but seriously it is going to share that you are going to be on a tear here in the upcoming months. Your dividends are going to be burning some oil soon/asap and it is going to be intense, we all should be on the watch out!
Dividend Hustler – $1,987.80 – Just killing it here. Hustler has been on the grind for a while and there is no end in sight for him, at all. He is a huge fan of the Canadian stocks and you can tell, by evidence of the dividends he collected in July. Congrats!
Dividend Niche – $13.40 – First off, congrats on the one year anniversary of the Niche Fund DN. Getting ready to see the dividend snowball start rolling?? Niche’s income came predominately from the Canadian Bank sector this month, which has some great dividend paying powerhouses. Can’t wait to see what year 2 has in store Niche!
Be Smart Rich – $794 – Welcome to the $200k club Be Smart Rich! Take a look at the chart, wow did your market value spike up quickly. And then on top of that, you receive a huge sum of dividend income. Amazing stuff!
American Dividend Dream – $425.20 – ADD with a very solid month, posting a 23% YOY dividend growth rate. Gotta love any dividend article that starts off with a Ray Charles quote, that is how you set the tone for success right there!
Dividend Hawk – $772.74 – Another investor bit by the lack of a Kraft-Heinz special dividend. But that’s didn’t stop Dividend Hawk from posting a sick dividend income total for the month! Boom.
There we have it….our July Dividend Income summary. Told all of you that the community is doing some amazing things; however, you already probably know that already! Now, let’s hope the market decides to continue cooling off in August and create some buying opportunities so we can turn our Watch List into actual purchases. Lanny has three great stocks he is itching to buy on his August Watch List , so let’s keep our fingers crossed so he can increase his position in them! Now, onward and upward. Can’t wait for this summary in August!