Questions and Answers
What is interest income?
All interest income is taxable.
False
What report is used for interest income?
Form 1099-INT
Interest on US T-bills is not taxable.
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What type of bond is most commonly issued at a discount?
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Under what condition can Series EE and I bonds be used tax-free?
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What is the reportable gift amount for deposits greater than $5,000?
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Cash back from credit card purchases is taxable.
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When is CD interest generally taxable?
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Which interest is generally exempt from federal income tax?
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What form is generally used to report dividend income?
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Qualified dividends are taxed as ordinary income.
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Study Notes
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.
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Description
Explore the concepts of interest and dividend income in this Unit 5 flashcards quiz. Learn about how interest income is generated, its tax implications, and how dividends are classified. Ideal for students studying personal finance or accounting.
