Unit 5: Interest and Dividend Income

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.

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.