Unit 5: Interest and Dividend Income

Interest Income

• Earned from deposits, notes receivable, and investments like bonds.
• Can be taxable or non-taxable; dividends from certain accounts are classified as taxable interest income.
• Reported on Form 1099-INT; taxpayers are responsible for tax even without the form.
• If interest exceeds $1,500, use Schedule B and cannot file 1040EZ; must use 1040 or 1040A instead.

Interest on US T-bills, Notes, and Bonds

• Interest is subject to federal income tax.
• Series EE bonds are issued at a discount, earning interest based on the difference between purchase price and redemption price.
• Series I bonds issued at face value, with interest payable at maturity and tax options available for reporting.
• Series HH bonds pay interest twice a year and report interest as paid.

Interest on Education Savings Bonds

• Series EE and I bonds can be tax-free for qualifying educational expenses.
• 2014 MAGI phaseouts: MFJ or QW taxpayers between $113,950 - $143,950, HOH taxpayers between $76,000 - $91,000.
• Exclusion calculated using Form 8815 must adhere to specific rules about purchasing bonds and managing tax-free benefit offsets.

Gift for Opening a Bank Account

• For deposits under $5K, gifts over $10 must be reported; over $5K, gifts over $20 are reportable.
• Cash bonuses, reward points, and airline miles are taxable.
• Cash back from credit card purchases is not taxable.

CD Interest

• Generally taxable upon receipt.
• Interest on loans borrowed to open a CD is deductible up to the net investment income.

Tax-Exempt Interest

• Interest from state and local government debt is typically exempt from federal income tax but may incur state/local taxes.
• Federally guaranteed debts are taxable.
• Reported on Line 8b of Form 1040; used in calculating taxability of certain income such as Social Security benefits.

Dividend Income

• Distributions of cash, stock, or property from corporations/mutual funds reported on Form 1099-DIV.
• Over $1,500 in dividend income must be reported on Schedule B; otherwise reported directly on 1040 or 1040A.
• Ordinary dividends are taxed as ordinary income unless qualified for capital gains treatment.
• Nondividend distributions reduce taxpayer's basis; upon reaching zero, any excess is taxed as capital gains.
• Qualified dividends receive preferred tax treatment reported on Box 1b of 1099-DIV.