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Chapter 8. Interest Income
Important Reminders
Education Savings Bond Program. You may be able to exclude from income interest
on qualified U.S. savings bonds that you redeem if you pay for qualified higher educational expenses. These are expenses for tuition and
required fees at an eligible educational institution (college or eligible
vocational school) for you, your spouse, or your dependent. A "qualified U.S.
savings bond" is a Series EE savings bond that is issued after December 31,
1989, to an individual 24 years of age or older.
Reporting tax-exempt interest. You must show on your tax return the amount of
any tax-exempt interest you received or accrued during the tax year. This is
an information-reporting requirement and does not convert tax-exempt interest
to taxable interest. For more information, see How to Report Interest Income.
Introduction
This chapter discusses:
∙ Different types of interest income,
∙ What interest is taxable and what interest is nontaxable,
∙ When to report interest income, and
∙ How to report interest income on your tax return.
In general, any interest that you receive or that is credited to your account
and can be withdrawn is taxable income. (It does not have to be entered in
your passbook.) However, interest that was credited in 1992 on deposits
that you could not withdraw because of the bankruptcy or insolvency of the
financial institution may not have to be included in your 1992 income. Other
exceptions to the interest income reporting rule are also discussed in this
chapter.
As an important part of your records, you should keep a list showing sources
and amounts of interest received during the year.
You may be able to deduct expenses you have in earning this income on Schedule
A (Form 1040) if you itemize your deductions. See Chapter 30.
Related publications and forms.
This chapter refers to several publications and forms that you may need. The
list of forms does not include Forms 1040, 1040A, and 1040EZ. For more
information, you may want to order any of the following:
Publication 525, Taxable and Nontaxable Income
Publication 537, Installment Sales
Publication 550, Investment Income and Expenses
Publication 925, Passive Activity and At-Risk Rules
Publication 1212, List of Original Issue Discount Instruments
Schedule B (Form 1040), Interest and Dividend Income
Schedule 1 (Form 1040A), Interest and Dividend Income for Form 1040A
Filers
1992 Instructions for Forms 1099, 1098, 5498, and W─2G
Form 1116, Foreign Tax Credit
Form 3115, Application for Change in Accounting Method
Form 8815, Exclusion of Interest From Series EE U.S. Savings Bonds Issued
After 1989
Form 8818, Optional Form To Record Redemption of College Savings Bonds
General Information
A few items of general interest are covered here.
Passive activity income and losses. There are tax rules which limit the
amount of losses and tax credits from passive activities that you can claim.
Generally, only income from passive activities can be used to offset losses
from passive activities. Consequently, you generally cannot use passive
activity losses to offset your other income, such as your wages or your
portfolio income (that is, any gross income from interest, dividends, etc.,
that is not derived in the ordinary course of a trade or business). For more
information about determining and reporting income and losses from passive
activities, see Publication 925, Passive Activity and At-Risk Rules.
Tax on investment income of a child under age 14. If a child is under age 14
at the end of the year and has more than $1,200 of investment income (such as
taxable interest and dividends), part of his or her investment income may be
taxed at the parents' tax rate if either parent is alive at the end of the
year. If these requirements are met, Form 8615, Tax for Children Under Age 14
Who Have Investment Income of More Than $1,200, must be completed and attached
to the child's tax return. If these requirements are not met, Form 8615 is
not required and the child's income is taxed at his or her own tax rate.
However, the parent can choose to include the child's interest and dividends
on the parent's return if certain requirements are met. Form 8814, Parent's
Election To Report Child's Interest and Dividends, is used for this purpose.
For more information about the tax on investment income of children and the
parent's election, see Chapter 32.
Beneficiary of an estate or trust. Interest, dividends, or other investment
income you receive as a beneficiary of an estate or trust is generally taxable
income. You should receive a Schedule K─1 (Form 1041), Beneficiary's Share of
Income, Deductions, Credits, etc. - 1992, from the fiduciary. Your copy of
Schedule K─1 and its instructions will tell you where to report the items from
Schedule K─1 on your Form 1040.
Backup withholding. To ensure that income tax is collected on interest and
other types of income that generally are not subject to withholding, backup
withholding will apply in certain circumstances.
Under backup withholding, when you open a new account you must certify under
penalties of perjury that your social security number is correct and that you
are not subject to backup withholding. If you fail to make this certification,
backup withholding may begin immediately on your new account or investment
and 20% of the interest paid on your account will be withheld. Your payer
will give you a Form W─9, Request for Taxpayer Identification Number and
Certification, or a similar form to make this certification. Backup
withholding may also be required if the Internal Revenue Service (IRS) has
determined that you underreported your interest or dividend income. For more
information, see Backup Withholding in Chapter 5.
Social security number. You must give your name and social security number to
any person required by federal tax law to make a return, statement, or other
document that relates to you. This includes payers of interest. If you are
married and the funds in a joint account belong to you, you should give
your social security number to the payer of the interest. If the funds in the
account belong to both you and your spouse, you may give either your number
or your spouse's number, so long as the number you provide corresponds with
the name listed on the account. You must give the payer the correct social
security number if the number being used is wrong.
If you do not give your social security number to the payer of interest, you
may have to pay a penalty. See Penalty for failure to supply social security
number under Penalties in Chapter 1. Backup withholding also may apply. See
Backup Withholding in Chapter 5.
Joint accounts. In a joint account, two or more persons, such as you and your
spouse, hold a savings account, bonds, or other property that pays interest,
as joint tenants, tenants by the entirety, or tenants in common. Each person
receives a share of any interest from the property. Each person's share is
determined by local law.
Income from property given to a child. Property you give as a parent to your
child under the Model Gifts of Securities to Minors Act, the Uniform Gifts to
Minors Act, or any similar law, is a true gift for federal gift tax purposes.
Income from property transferred under these laws is taxable to the child
unless it is used in any way to satisfy a legal obligation of support of
that child. The income is taxable to the person having the legal obligation
to support the child (parent or guardian) to the extent that it is used for
the child's support.
Savings account with parent as trustee. Interest income, derived from a
savings account opened for a child who is a minor but placed in the name,
and subject to the order, of the parents as trustees, is taxable to the child,
if, under the law of the state in which the child resides:
1) The savings account legally belongs to the child, and
2) The parents are not legally permitted to use any of the funds to support
the child.
Form 1099─INT. Interest income is generally reported to you on Form 1099─INT,
Interest Income, or a similar statement, by banks, savings and loans, and
other payers of interest. This form shows you the interest you received during
the year. Keep this form for your records. You do not have to attach it to
your tax return.
Report on your tax return the total amount of interest income that is shown
on any Form 1099─INT that you receive for the tax year. You must report all
of your taxable interest income even if you do not receive a Form 1099─INT.
Reporting backup withholding. If backup withholding is deducted from your
interest income, the payer must give you a Form 1099─INT that indicates the
amount withheld. Any backup withholding will be shown on Form 1099 as "Federal
income tax withheld."
Nominees. Generally, if someone receives interest as a nominee for you, that
person will give you a Form 1099─INT showing the interest they received on
your behalf.
If you receive a Form 1099─INT that includes amounts belonging to another
person, see the discussion on nominee distributions, later, under How to
Report Interest Income.
Incorrect amount. If you receive a Form 1099─INT that shows an incorrect
amount (or other incorrect information), you should ask the issuer for
a corrected form. The corrected Form 1099─INT you receive will be marked
"CORRECTED."
Interest on Form 1099─OID. Reportable interest income may also be shown on
Form 1099─OID, Original Issue Discount. For more information about amounts
shown on this form, see Original Issue Discount (OID), later in this chapter.
Accuracy-related penalty. A 20% accuracy-related penalty may be charged for
underpayments of tax due to negligence or disregard of rules and regulations
or substantial understatement of tax. For more information on the penalty
and any applicable interest, see Penalties in Chapter 1.
Individual Retirement Arrangements (IRAs). Interest that you earn on an IRA
is tax-deferred. You generally do not include it in your income until you make
withdrawals from the IRA. Nor is it included in the amount to be reported as
tax-exempt interest. See Chapter 18.
Exempt-interest dividends you receive from a regulated investment company
(mutual fund) are not included in your taxable income. (However, see
Information reporting requirement, next.) You will receive a notice from the
mutual fund telling you the amount of the tax-exempt-interest dividends that
you received. Exempt-interest dividends are not shown on Form 1099─DIV or
Form 1099─INT.
Information reporting requirement. Although these dividends are not taxable,
you must show them on your tax return if you are required to file. This is an
information reporting requirement and does not convert the exempt-interest
dividend to taxable income. See How to Report Interest Income, later. Also,
exempt-interest dividends may be treated as tax-exempt interest on specified
private activity bonds, which is a "tax preference item" that may be subject
to the alternative minimum tax. See Alternative Minimum Tax in Chapter 31 for
more information. Publication 550 contains a discussion on private activity
bonds, under State or Local Government Obligations.
Interest income on frozen deposits. A frozen deposit is an account from
which you are unable to withdraw funds because:
1) The financial institution is bankrupt or insolvent, or
2) The state where the financial institution is located has placed limits
on withdrawals because other banks in the state are bankrupt or insolvent.
You can choose to exclude from your gross income interest credited during 1992
on frozen deposits that you could not withdraw by the end of 1992.
The amount of interest you can exclude from gross income in 1992 is the
interest that was credited on the frozen deposits minus the sum of:
1) The net amount you withdrew from these deposits during 1992, and
2) The amount you could withdraw as of the end of 1992 (not reduced by
any penalty for premature withdrawals of a time deposit).
Report the excluded part of the interest in your gross income in the tax year
in which it is withdrawable. If you receive a Form 1099─INT for interest
income on deposits that were frozen at the end of 1992, see Frozen deposits
later under How to Report Interest Income, for information about reporting
this interest income exclusion on your 1992 tax return.
Interest on VA dividends. Interest on insurance dividends that you leave on
deposit with the Department of Veterans Affairs (VA) is not taxable. This
includes interest paid on dividends on converted United States Government
Life Insurance and on National Service Life Insurance policies.
Taxable Interest
Taxable interest includes interest you receive from bank accounts, loans you
make to others, and interest from most other sources. The following are some
other sources of taxable interest.
Dividends that are actually interest. Certain distributions commonly referred
to as dividends are actually interest. You must report as interest so-called
"dividends" on deposits or on share accounts in:
Cooperative Banks
Credit Unions
Domestic Building and Loan Associations
Domestic Savings and Loan Associations
Federal Savings and Loan Associations
Mutual Savings Banks
Money market funds. Generally, amounts you receive from money market funds
should be reported as dividends, not as interest.
Money market certificates, savings certificates, and other deferred interest
accounts. If you open any of these accounts, and interest is paid at fixed
intervals of one year or less during the term of the account, you must include
this interest in your income when you actually receive it or are entitled to
receive it without paying a substantial penalty. The same is true for accounts
that mature in one year or less and give a single payment of interest at
maturity. If interest is deferred for more than one year, see Original Issue
Discount (OID), later.
Money borrowed to invest in money market certificate. The interest you pay on
money borrowed from a bank or savings institution to meet the minimum deposit
required for a money market certificate from the institution and the interest
you earn on the certificate are two separate items. You must report the
total interest you earn on the certificate in your income. You may deduct
the interest you pay, as investment interest subject to certain limits, only
if you itemize deductions.
Example. You deposit $5,000 with a bank and borrow $5,000 from the bank to
make up the $10,000 minimum deposit required to buy a 6─month money market
certificate. The certificate earns $575 at maturity in 1992, but you receive
only $265, which represents the $575 you earned minus $310 interest charged on
your $5,000 loan. The bank gives you a Form 1099─INT for 1992 showing the $575
interest you earned. The bank also gives you a statement showing that you paid
$310 interest for 1992. You must include the $575 in your income. You may
deduct $310 on Schedule A (Form 1040) if you itemize your deductions,
subject to the investment interest expense limit.
The fair market value of "gifts" or services you receive for making long-term
deposits or for opening accounts in savings institutions is interest. Report
it in income in the year you receive it.
Example. In 1992, you open a savings account at your local bank. The account
earns $20, which is credited as interest. You also receive a $10 calculator.
If no other interest is credited to your account during 1992, the Form
1099─INT you receive would show $30 interest income for 1992.
Interest on insurance dividends that you leave on deposit with an insurance
company, that is credited annually, and that can be withdrawn annually, is
taxable to you when the interest is credited to your account. However, if you
can only withdraw it on the anniversary date of the policy (or other specified
date), the interest is taxable in the year in which that date occurs.
Prepaid insurance premiums. Any increase in the value of prepaid insurance
premiums, advance premiums, or premium deposit funds is interest if it is
applied to the payment of premiums due on insurance policies or made available
for you to withdraw. Your insurance company must give you a Form 1099─INT
showing the interest you earned for the year if you had $10 or more of
interest income from that company.
Interest on U.S. obligations, such as U.S. Treasury bills, notes, and bonds,
issued by any agency or instrumentality of the United States, is taxable for
federal income tax purposes, but is exempt from all state and local income
taxes.
Treasury bills are issued at a discount and generally have 13─week, 26─week,
and 52─week maturity periods. The difference between the discounted price
you pay for the bills and the face value you receive at maturity is interest
income. Report this interest income when the bill is paid at maturity.
Treasury notes range in maturity periods from 1 to 10 years. Maturity periods
for Treasury bonds are longer than 10 years. Interest on these notes and bonds
is paid at stated intervals by interest checks or by direct deposit to your
designated checking or savings account through the TREASURY DIRECT system.
For more information, see U.S. Treasury Bills, Notes, and Bonds in Publication
550.
For information on Series EE and Series HH Savings Bonds, see U.S. Savings
Bonds, later.
Interest on tax refund. Interest you receive on tax refunds is taxable income.
Interest on condemnation awards. If the condemning authority pays you interest
to compensate you for a delay in paying an award, the interest is taxable.
Installment sale payments. Certain deferred payments you receive under a
contract for the sale or exchange of property provide for interest that is
taxable. If little or no interest is provided for in certain contracts with
payments due more than one year after the date of sale, each payment due more
than 6 months after the date of sale will be treated as containing interest.
The unstated interest rules apply to certain payments received on account of
a seller-financed sale or exchange of property. See Unstated Interest in
Publication 537, Installment Sales.
Accumulated interest on an annuity contract you sell before its maturity date
is taxable.
Usurious interest is taxable unless state law automatically changes it to a
payment on the principal. Usurious interest is interest charged at an illegal
rate.
Accrued interest on bonds. If you sell bonds between interest payment dates,
the accrued interest paid to you is taxable. See Bonds Sold Between Interest
Dates, later.
Bonds traded flat. If you purchase bonds when interest has been defaulted
or when the interest has accrued but has not been paid, that interest is not
income and is not taxable as interest if later paid. Such payments are returns
of capital which reduce the remaining cost basis. Interest which accrues after
the date of purchase, however, is taxable interest income for the year in
which received or accrued. See Bonds Sold Between Interest Dates, later, for
more information.
Interest on below-market loans. A below-market loan is a loan on which
no interest is charged or on which interest is charged at a rate below the
applicable federal rate. See Below-Market Loans in Publication 550 for
more information.
U.S. Savings Bonds
You may earn interest on U.S. Savings Bonds in one of two ways. On some bonds,
interest is paid at stated intervals by interest checks or coupons. Other
bonds are issued at a discount and pay all interest at redemption or maturity.
The interest on the latter is the difference between what you pay for the bond
and its redemption or maturity value.
This section provides information on different types of U.S. Savings Bonds,
how to report the interest income on these bonds, and how to treat transfers
of these bonds.
Cash-basis taxpayers. If you use the cash method of accounting, as most
individual taxpayers do, you generally report the interest on U.S. Savings
Bonds when you receive it. The cash method of accounting is explained in
Chapter 1 under Accounting Periods and Methods.
Accrual-basis taxpayers. If you use the accrual method of accounting, you
must report interest on U.S. Savings Bonds each year as it accrues. You cannot
postpone reporting interest until you receive it or the bonds mature. The
accrual method of accounting is explained in Chapter 1 under Accounting
Periods and Methods.
Series HH Bonds. These bonds are issued at face value. Interest is paid twice
a year by check. If you are a cash-basis taxpayer, you must report interest
on these bonds as income in the year you receive it.
Series HH Bonds were first offered in 1980. Before 1980, Series H Bonds were
issued. Series H Bonds are treated the same as Series HH Bonds. If you are
a cash-basis taxpayer, you must report the interest when you receive it.
Series EE Bonds. These bonds are issued at a discount. You pay less than the
face amount for the bonds. The face amount is payable to you at maturity.
The difference between the purchase price and the redemption value is taxable
interest.
Series EE Bonds were first offered in 1980. Before 1980, Series E Bonds were
issued. If you own either Series EE or Series E Bonds and use the cash method
of reporting income, you can:
1) Postpone reporting the interest until the earlier of the year you cash
the bonds or the year in which they finally mature (method 1), or
2) Choose to report the increase in redemption value as interest each year
(method 2).
If you want to change your method of reporting the interest from method (1)
to method (2), you can do so without permission from the IRS. However, in the
year of change you must report all interest accrued to date and not previously
reported for all such bonds.
Once you choose to report the interest each year, you must continue to do so
for all Series EE or Series E Bonds you own and for any you get later, unless
you request permission to change, as discussed next.
Form 3115. To change from method (2) to method (1), complete Form 3115,
Application for Change in Accounting Method, and attach it to your income tax
return for the year of change. Type or print at the top of page 1 of the Form
3115 "Filed Under Rev. Proc. 89─46." The return must be filed by the due date
(including extensions). You must identify the savings bonds for which this
change in accounting method is requested.
Permission for the change is automatically granted if you attach to Form 3115
a statement that you agree to report all interest on the bonds acquired:
1) During the year of change and for all subsequent tax years when the
interest is realized upon disposition, redemption, or final maturity,
whichever is earlier, and
2) Before the year of change when the interest is realized upon disposition,
redemption, or final maturity, whichever is earlier, with the exception
of any interest income previously reported in prior tax years.
Note. If you plan to redeem Series EE bonds in the same year that you pay for
higher education expenses, you should use method (1). See Education Savings
Bond Program later for more information.
If you hold the bonds beyond the original maturity period, and you have chosen
to report the interest each year, you must continue to do so unless you get
permission to change your method of reporting. If you have chosen to postpone
reporting the interest, you need not include the interest in income for the
year of original maturity. Report it in the year you redeem the bonds or the
year in which the extended maturity period ends, whichever is earlier. The
original maturity period has been extended on all Series E Bonds.
Series E Bonds issued between May 1941 and April 1952 have a term of 40 years,
and the Department of the Treasury has announced that no further extension
will be given to these bonds. Therefore, if you have postponed reporting
interest on Series E Bonds purchased in 1952, you must report the interest
on your 1992 return, unless you trade your Series E Bonds for Series HH Bonds.
Co-owners. If you buy a U.S. Savings Bond issued in your name and another
person's name as co-owners, such as you and your child or you and your spouse,
interest on the bond is taxable to the co-owner who bought the bond. If you
used your funds to buy the bond, you must pay the tax on the interest. This
is true even if you let the other co-owner redeem the bond and keep all the
proceeds. Under these circumstances, since the other co-owner will receive a
Form 1099─INT at the time of redemption, the other co-owner must provide you
with another Form 1099─INT showing the amount of interest from the bond that
is taxable to you. See Nominee distributions and accrued interest, later,
under How to Report Interest Income, for more information about providing
a Form 1099─INT to another person.
Ownership transferred. If you bought Series EE or Series E Bonds entirely with
your own funds and have them reissued in your co-owner's name or beneficiary's
name alone, you must include in your gross income for the year of reissue
all interest that you earned on such bonds and have not previously reported.
But, if the bonds were reissued in your name alone, you do not have to report
the interest accrued at that time. This same rule applies when bonds are
transferred between spouses incident to divorce.
Purchased jointly. If you buy Series EE or Series E Bonds jointly with a
co-owner and have them reissued in the co-owner's name alone, you must include
in your gross income for the year of reissue your share of all the interest
earned on the bonds that you have not previously reported. At the time of
reissue, the former co-owner does not have to include in gross income his
or her share of the interest earned that was not reported before the transfer.
This interest, however, as well as all interest earned after the reissue,
is income to the former co-owner.
This income reporting rule also applies when the bonds are reissued in the
name of your former co-owner and a new co-owner, except that the new co-owner
will report only his or her share of the interest earned after the transfer.
If bonds that you and a co-owner bought jointly are reissued to each of you
separately in the same proportion as your contribution to the purchase price,
neither you nor your co-owner has to report at that time the interest earned
before the bonds were reissued.
Example. You and your spouse each spent an equal amount to buy a $1,000 Series
EE Savings Bond. The bond was issued to you as co-owners. You both postpone
reporting interest on the bond. You later have the bond reissued as two $500
bonds, one in your name and one in your spouse's name. At that time neither
you nor your spouse has to report the interest earned to the date of reissue.
But if you bought the $1,000 bond entirely with your own funds, you must
report half the interest earned to the date of reissue. This is the previously
postponed interest earned on the $1,000 bond that is attributable to the $500
bond issued to your spouse.
Transfer to a trust. If you own Series EE or Series E Bonds and transfer them
to a trust, giving up all rights of ownership, you must include in your income
for that year the interest earned to the date of transfer, if you have not
already reported it. However, if you are considered the owner of the trust and
if the increase in value both before and after the transfer continues to be
taxable to you, you can continue to postpone reporting the interest earned
each year. You must include the total interest in your income when the bonds
are cashed or finally mature, whichever is earlier.
The same rules apply to previously unreported interest on Series EE or Series
E Bonds if the transfer to a trust consisted of Series HH or Series H Bonds
you got in a trade for the Series EE or Series E Bonds. See Savings bonds
traded, later.
Decedents. The manner of reporting interest income on Series EE or Series
E Bonds, after the death of the owner, depends on the accounting and income
reporting method previously used by the decedent. If the bonds transferred
because of death were owned by a person who used the accrual method, or who
used the cash method and had chosen to report the interest each year, the
interest earned in the year of death up to the date of death must be reported
on that person's final return. The person who acquires the bonds includes in
income only interest earned after the date of death.
If the transferred bonds were owned by a decedent who used the cash method,
who had not chosen to report the interest each year, and who bought the bonds
entirely with his or her own funds, all interest earned before death must be
reported in one of the following ways:
1) The surviving spouse or personal representative (executor, administrator,
etc.) who files the final income tax return of the decedent can choose to
include on that return all of the interest earned on the bonds before the
decedent's death. The person who acquires the bonds then includes in
income only interest earned after the date of death, or
2) If the choice in (1) is not made, the interest earned up to the date of
death is income in respect of a decedent. It should not be included in
the decedent's final return. All of the interest earned both before and
after the decedent's death is income to the person who acquires the bonds.
If that person uses the cash method and does not choose to report the
interest each year, he or she can postpone reporting any of it until the
bonds are cashed or finally mature, whichever is earlier. In the year
that person reports the interest, he or she can claim a deduction for any
federal estate tax paid that was for the part of the interest included in
the decedent's estate.
For more information on income in respect of a decedent, see Chapter 4.
Savings bonds traded. If you traded Series E Bonds for Series H Bonds, or
traded Series EE or Series E Bonds for Series HH Bonds, you did not realize
taxable income unless you received cash in the trade. Any cash you received
is income to the extent of the interest earned on the bonds traded. When your
Series HH or Series H Bonds mature, or if you dispose of them before maturity,
you report as interest the difference between their redemption value and your
cost. Your cost is the sum of your cost of the traded Series EE or Series E
Bonds plus any amount you had to pay at the time of the trade.
Example. You trade Series E Bonds with a redemption value of $2,723.35 for
Series HH Bonds. You get $2,500 in Series HH Bonds and $223.35 in cash. You
must report the $223.35 as taxable income in the year of the trade to the
extent that you did not report interest on the Series E Bonds you traded.
$500 minimum value. Series EE or Series E Bonds that you want to trade
must have a current redemption value of $500 or more. To figure the current
redemption value of the bonds to be traded, you must add the accrued
interest to their original purchase price.
You can choose to treat all of the accrued interest on the Series EE or Series
E Bonds traded for Series HH Bonds as income in the year of the trade.
Form 1099─INT for U.S. Savings Bonds interest. When you cash a bond, the bank
or other payer that redeems it must give you a Form 1099─INT if the interest
part of the payment you receive is $10 or more. Box 3 of your Form 1099─INT
should show the interest as the difference between the amount you received
and the amount paid for the bond. However, your Form 1099─INT may show more
interest than you are required to include on your income tax return. For
example, this may happen if:
1) You chose to report the increase in the redemption value of the bond each
year. The interest shown on your Form 1099─INT will not be reduced by
amounts previously included in income.
2) You received a bond from a decedent. The interest shown on your Form
1099─INT will not be reduced by any interest reported by the decedent
before death, or on the decedent's final return, or by the estate on
the estate's income tax return.
3) Ownership of a bond was transferred. The interest shown on your Form
1099─INT will not be reduced by interest that accrued prior to the
transfer.
4) You redeemed a bond on which you were named as a co-owner but for which
you did not use your funds to buy the bond. (See Co-owners, earlier in
this chapter, for more information about the reporting requirements.)
5) You received a taxable distribution of bonds from a retirement or profit-
sharing plan. The interest shown on your Form 1099─INT will not be
reduced by the interest portion of amounts taxable as a distribution from
a retirement or profit-sharing plan and not taxable as interest. (These
amounts are generally shown on Form 1099─R, Distributions From Pensions,
Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts,
etc.)
For information on including the correct amount of interest on your return
for (1), (2), (3), and (4) above, see How to Report Interest Income, later.
Publication 550 includes examples showing how to report these amounts.
If you received a taxable distribution of bonds from a retirement or profit-
sharing plan ((5), above), see Interest from U.S. Savings Bonds under
How to Report Interest Income in Publication 550 for information on how to
report the interest.
Note. U.S. Savings Bond interest is exempt from state and local taxes. The
Form 1099─INT you receive will indicate the amount that is for U.S. Savings
Bond interest in Box 3. Do not include this amount on your state or local
income tax return.
Education Savings Bond Program. You may be able to exclude from income all or
part of the interest you receive on the redemption of qualified U.S. Savings
Bonds during the year if you pay qualified higher educational expenses during
the same year. This exclusion is known as the Education Savings Bond Program.
Married taxpayers who file separate returns do not qualify for this exclusion.
Qualified U.S. Savings Bonds. A qualified U.S. Savings Bond is a Series EE
U.S. Savings Bond issued after December 31, 1989. The bond must be issued
either in your name (sole owner) or in your and your spouse's name (co-owners).
You must be at least 24 years old before the bond's issue date.
The date a bond is issued may be earlier than the date the bond is purchased
because bonds are issued as of the first day of the month in which they are
purchased. You may designate any individual (including a child) as a
beneficiary of the bond (payable on death).
Eligible expenses. Qualified higher educational expenses are tuition and fees
required for you, your spouse, or your dependent (for whom you can claim an
exemption) to attend an eligible educational institution. Eligible expenses do
not include expenses for room and board or for courses involving sports, games,
or hobbies that are not part of a degree program.
Eligible educational institutions are those which qualify for federal
assistance and include most public and nonprofit universities and colleges
and certain vocational schools.
Amount excludable. If the total redemption proceeds (interest and principal)
from the qualified U.S. Savings Bonds you redeem during the year are not more
than your qualified higher educational expenses for the year, you can exclude
all of the interest. If the proceeds are more than the expenses, you will only
be able to exclude part of the interest.
To determine the excludable amount, multiply the interest part of the
redemption proceeds by a fraction. The numerator (top part) of the fraction
is the qualified higher educational expenses you paid during the year. The
denominator (bottom part) of the fraction is the total redemption proceeds
you received during the year.
Example. In October 1992, Mark and Joan, a married couple, cashed qualified
Series EE U.S. Savings Bonds they bought in January 1991. In 1992, they helped
pay for their daughter's college tuition. They received proceeds of $5,408,
representing principal of $5,000 and interest of $408. The qualified higher
educational expenses they paid during 1992 totaled $4,000. They can exclude
$302 ($408 * ($4,000 ÷ $5,408)) of interest in 1992.
Exclusion reduced for certain benefits. Before you figure your interest
exclusion, you must reduce your qualified higher educational expenses by
certain benefits the student may have received. These benefits include
qualified scholarships that are exempt from tax and any other nontaxable
payments (other than gifts, bequests, or inheritances) received for
educational expenses, such as Department of Veterans Affairs educational
assistance benefits and employer-provided educational assistance benefits.
See Publication 520, Scholarships and Fellowships, for more information on
qualified scholarships.
Modified adjusted gross income limit. The interest exclusion is not allowed
unless modified adjusted gross income (modified AGI) is less than:
∙ $59,150 for taxpayers filing single, head of household, or
qualifying widow(er) with dependent child, and
∙ $96,200 for married taxpayers filing jointly.
You do not qualify for the interest exclusion if your modified AGI is more
than these limits.
Modified AGI, for purposes of this exclusion, is adjusted gross income
(line 16 of Form 1040A or line 31 of Form 1040) figured before the
interest exclusion, modified by adding back any:
1) Foreign earned income exclusion,
2) Foreign housing exclusion or deduction,
3) Exclusion for income from certain U.S. possessions, and
4) Exclusion for income from sources within Puerto Rico.
If you do not have any of these items, your modified AGI is your adjusted
gross income before the interest exclusion.
If you have investment interest expense attributable to royalty income, see
Education Savings Bond Program in Publication 550.
Form 8815. Use Form 8815, Exclusion of Interest From Series EE U.S. Savings
Bonds Issued After 1989, to figure your exclusion and to compute your modified
AGI.
Recordkeeping. If you claim the interest exclusion, you must keep a written
record of the post─1989 Series EE U.S. Savings Bonds that you redeem. Your
written record must include the serial number, issue date, face value, and
redemption proceeds of each post─1989 Series EE bond. You may use Form 8818,
Optional Form To Record Redemption of College Savings Bonds, to keep this
information.
You should also keep bills, receipts, canceled checks, or other documentation
that shows you paid qualified higher educational expenses during the year.
Bonds Sold Between Interest Dates
When bonds are sold between interest dates, part of the sales price represents
interest accrued to the date of sale. The seller must report this interest
in gross income. The purchaser may treat this amount as a capital investment
and deduct it from the next interest payment as a return of capital, but must
report the total payment as taxable interest and show the accrued interest
as an adjustment (or subtraction). See Nominee distributions and accrued
interest, later under How to Report Interest Income, for information about
making this adjustment.
If the bond is an original issue discount (OID) debt instrument, see Original
Issue Discount (OID), later, to determine the OID you must include in income.
Also, see Original issue discount (OID), under How to Report Interest Income,
for information on how to report OID on your income tax return.
If the bond has market discount, see Market discount bonds, later under
Original Issue Discount (OID), for information about the accrued market
discount that must be recognized as interest income.
Insurance Received in Installments
If insurance proceeds are payable to you because your spouse died before
October 23, 1986, and you receive the proceeds in installments, you can
exclude up to $1,000 a year of the interest included in the installments. This
$1,000 interest exclusion is in addition to the part of each installment that
you do not include in income because it is a recovery of the lump sum payable
at death. (See Life Insurance Proceeds in Chapter 13.) If you later remarry,
you can continue to take the $1,000 interest exclusion. If your spouse died
after October 22, 1986, you do not qualify for the $1,000 interest exclusion.
Example. Fern Green, a widow whose husband died in June 1986, chooses to
receive the proceeds of her husband's $75,000 life insurance policy in
ten yearly installments of $11,250. The payments are based on a guaranteed
interest rate. She will include $2,750 in income each year. She figures this
as follows:
Fixed payment ................................. $11,250
Minus: Amount of insurance principal
($75,000÷10) ................................ 7,500
__________
Interest included in installment .............. $3,750
Minus: Annual $1,000 interest exclusion 1,000
Amount included in gross income $2,750
==========
If you buy an annuity with life insurance proceeds, the annuity payments you
receive are taxed as pension and annuity income, not as interest income. See
Publication 939, Pension General Rule (Nonsimplified Method), for information
on taxation of pension and annuity income.
For more information about the tax treatment of insurance proceeds, see Life
Insurance Proceeds in Publication 525, Taxable and Nontaxable Income.
Original Issue Discount (OID)
A long-term debt instrument, such as a bond, note, or other evidence of
indebtedness, generally has original issue discount (OID) when the instrument
is issued for a price that is less than its stated redemption price at
maturity (principal amount). The amount of OID is the difference between
the principal amount and the issue price of the instrument. OID is a form of
interest; however, you report OID as it accrues, whether or not you receive
any payments from the bond issuer. All long-term debt instruments that pay
no interest prior to maturity are presumed to be issued at a discount.
Zero-coupon bonds are one example of such instruments.
The OID rules do not apply to short-term obligations (those with a fixed
maturity date of one year or less from date of issue). See Discount on
Short-Term Obligations in Publication 550.
De minimis OID. You can disregard the discount and treat it as zero if it is
less than one-fourth of 1% (.0025) of the stated redemption price at maturity,
multiplied by the number of full years from the date of original issue to
maturity. This small discount is known as "de minimis OID."
Example 1. You bought a 10─year bond, with a stated redemption price at
maturity of $1,000, issued at $980 and having OID of $20. One-fourth of 1% of
$1,000 (stated redemption price) times 10 (number of full years from the date
of original issue to maturity) equals $25. Because the $20 discount is less
than $25, you can disregard reporting the OID.
Example 2. Assume the same facts as in Example 1, except that the bond was
issued at $950. The OID is $50. Because the $50 discount is more than the $25
figured in Example 1, you must report the OID.
Form 1099─OID. The issuer of the debt instrument (or your broker, if you did
not purchase the instrument directly from the issuer) should give you Form
1099─OID, Original Issue Discount, or a similar statement, if the total OID
for the calendar year is $10 or more. Form 1099─OID shows the amount of OID
for the calendar year. It also will show the stated interest that you must
include in your income. A copy of Form 1099─OID will be sent to the IRS.
Do not file your copy with your return. Keep it for your records. See
Recomputation of OID shown on Form 1099─OID, later in this discussion and
also Original issue discount (OID), later under How to Report Interest
Income, for more information.
Nominee. If someone is the holder of record (the registered owner) of an OID
instrument that belongs to you and receives a Form 1099─OID on your behalf,
that person must give you a Form 1099─OID. The form should show the OID for
the entire year regardless of whether you owned or held the instrument for
the entire year.
Debt instrument bought at premium. If you bought at a premium a debt
instrument that was originally issued at a discount, you do not have to
report any OID as ordinary income. Premium means a purchase price that exceeds
the stated redemption price of the instrument at maturity. When you sell or
redeem an instrument bought at a premium, the difference between the sale
or redemption price and your purchase price is a capital gain or loss.
This rule, however, does not apply if you bought a debt instrument and paid an
"acquisition premium." See Acquisition premium, later in this discussion, for
more information.
Exceptions to the OID rules. The OID rules discussed in this chapter for
publicly offered, long-term instruments do not apply to the following debt
instruments:
1) Tax-exempt obligations (however, see Stripped tax-exempt obligations
under Stripped Bonds and Coupons in Publication 550),
2) U.S. Savings Bonds,
3) Short-term debt instruments (those which have fixed maturity dates of
not more than one year from the date of issue),
4) Obligations issued by an individual before March 2, 1984, and
5) Loans of $10,000 or less from individuals (when increased by the
outstanding amount of prior loans by that individual to the other
individual) who are not in the business of lending money. (This exception
does not apply if a principal purpose of the loan is to avoid any federal
tax.)
Debt instruments issued after 1954 and before May 28, 1969 (or before July
2, 1982, if a government instrument). For these instruments, you pay no tax
on the OID until the year the instrument is sold, exchanged, or redeemed. If a
gain results, and if the instrument is a capital asset, the amount of the gain
equal to the OID is taxed as ordinary interest income. The balance of the gain
is capital gain. If there is a loss on the sale of the instrument, the entire
loss is a capital loss and no reporting of OID is required.
Corporate debt instruments issued after May 27, 1969, and before July 2, 1982.
If you hold these debt instruments as capital assets, you must include a part
of the discount in your gross income each year that you own the instruments.
Your basis in the instrument is increased by the amount of OID that you
include in your gross income.
If you bought the instruments at original issue and held them for all of 1992,
or the part of 1992 that they were outstanding, include in your gross income
the total OID from Form 1099─OID. If the instruments you bought at original
issue were outstanding for all of 1992, but you did not hold them for the
entire year, figure your taxable OID as follows. Divide the total OID for 1992
by 12 and multiply the result by the number of complete and partial months
(for example, 6-1/2 months) you held the instruments in 1992.
If you bought the instrument after its original issue, see Recomputation of
OID shown on Form 1099─OID, later, for more information.
Debt instruments issued after July 1, 1982, and before January 1, 1985. If you
hold these debt instruments as capital assets, you must include a part of the
discount in your gross income each year and increase your basis by the amount
included. You report the total OID from Form 1099─OID if you bought the
instruments at original issue and held them all of 1992 (or the part of
1992 that they were outstanding). However, if the instruments you bought at
original issue were outstanding for all of 1992, but you did not hold them
the entire year, figure your taxable OID as follows. Divide the total OID for
1992 (shown on Form 1099─OID) by 365 and multiply the result by the number of
days you held the instrument in 1992. This simple computation, however, is an
approximation and may result in slightly higher taxable OID than if you follow
the more exact constant interest method, using an accrual period of one year.
Publication 1212, List of Original Issue Discount Instruments, discusses this
method under Debt Instruments Issued After July 1, 1982, and Before January
1, 1985.
If you did not acquire the debt instrument at its original issue, see
Recomputation of OID shown on Form 1099─OID, later.
Debt instruments issued after December 31, 1984. If you hold these debt
instruments, the OID reporting rules, in general, are similar to those for
debt instruments issued after July 1, 1982. However, you report the total
applicable OID (based on the number of days in the accrual period) regardless
of whether you hold that debt instrument as a capital asset. Your basis in
the instrument is increased by the amount of OID that you include in your
gross income. The method for determining the reportable discount on any OID
instrument issued after 1984 is based on an accrual period of 6 months. For
more information about determining reportable OID for these debt instruments,
see Debt Instruments Issued After December 31, 1984, in Publication 1212.
Recomputation of OID shown on Form 1099─OID. If you bought a debt instrument
at original issue and held it for all of 1992, or the part of 1992 that it was
outstanding, include in your gross income the total OID shown in Box 1 and any
interest shown in Box 2 of Form 1099─OID. However, because the amount of OID
shown on Form 1099─OID may have been determined on the assumption that you
purchased the related debt instrument at original issue and owned it for the
entire calendar year (or every day of the calendar year that the instrument
was outstanding), the amount of OID shown in Box 1 of Form 1099─OID may not
be the correct amount for you to include in your income.
You must recompute your correct share of the OID shown in Box 1 of Form
1099─OID if any of the following apply to your ownership or holding of
a long-term OID debt instrument:
1) The corporate instrument bought by you at original issue was outstanding
for all (or part) of 1992, but you did not hold it for the entire period
it was outstanding in 1992, or
2) The corporate instrument was bought by you after its original issue, or
3) The debt instrument is a stripped bond or a stripped coupon (these
include zero coupon U.S. Treasury-backed securities).
For each of these situations, see Publication 1212 for detailed information
and examples on figuring the amount of OID to report on your income tax
return. The rules for figuring OID are broken down in Publication 1212
to reflect the specific computations that apply to corporate long-term OID
debt instruments issued before July 2, 1982, and to all long-term OID debt
instruments issued after July 1, 1982.
Reporting correct amount of OID. If you are reporting OID in an amount greater
or less than the amount shown on Form 1099─OID, see Original issue discount
(OID) at the end of this chapter, for information about reporting the correct
amount of OID on Schedule B (Form 1040).
Acquisition premium. If you bought a debt instrument for more than the
original issue price plus accumulated OID from the date of issue, that excess
amount (or acquisition premium) reduces the amount of discount includible
in your income. See Computation of reportable OID in Publication 1212 for
information about figuring this reduction.
REMIC regular interests. If you own a regular interest in a real estate
mortgage investment conduit (REMIC), you will receive a Form 1099─OID and an
additional written statement from your broker. Form 1099─OID shows the amount
of OID and interest, if any, that accrued to you for the period you held the
regular interest. You will not need to make any adjustments to the amounts
reported even if you held the regular interest for only a portion of the
calendar year. The additional written statement should also contain enough
information to enable you to figure your accrual of market discount or
amortizable bond premium. See REMICs in Publication 550 for more information.
If a Form 1099─OID is not received. If you had OID for 1992 but did not
receive a Form 1099─OID, see Publication 1212 which lists total OID on certain
debt instruments. If your debt instrument is not listed in Publication 1212,
consult the issuer for further information about the OID that accrued for
1992.
Recomputation of periodic interest shown on Form 1099─OID. If you disposed
of a corporate debt instrument or acquired it from another holder during 1992,
see Bonds Sold Between Interest Dates, earlier, for information about the
treatment of periodic interest that may be shown in Box 2 of Form 1099─OID
for that instrument. See Nominee distributions and accrued interest under How
to Report Interest Income, later, for information about reporting the correct
amount of interest on Schedule B (Form 1040).
Stripped bonds and stripped coupons. Special rules apply to the sale
and purchase of stripped bonds and stripped coupons after July 1, 1982.
These rules also cover the treatment of zero coupon U.S. Treasury-backed
securities. See Rules for Figuring OID on Stripped Bonds and Stripped
Coupons in Publication 1212 for more information.
Certificates of deposit (CDs) and similar deposit arrangements. If
you purchase a CD or a similar deposit arrangement and the receipt of
interest is postponed for more than one year, you must include in income
each year a part of the total interest due and report it in the same way
as other original issue discount (OID).
Examples of such deposit arrangements with banks, building and loan
associations, etc., include:
Certificates of deposit
Time deposits
Bonus plans
Savings certificates
Deferred income certificates
Bonus savings certificates
Growth savings certificates
Interest subject to penalty for early withdrawal. If you deposit money in one
of the arrangements listed above that has a term of one year or less, and you
lose part of the interest because you withdraw funds before the end of the
term, you must include all the interest in income at the end of the term.
However, you can deduct the entire penalty, even if it exceeds your interest
income, on line 28 of Form 1040.
Example. On October 1, 1992, you invested $10,000 in a savings certificate
that will pay you $10,600 on April 1, 1993. Because you withdraw part of the
principal or interest before April 1, the bank charges you a penalty of $300.
For 1993, you must report as income the entire $600 accrued interest. However,
you can deduct, as an adjustment to gross income, the $300 penalty.
Bearer certificates of deposit are not issued in the depositor's name and,
therefore, are transferable from one individual to another. They are issued
by banks for a certain period, usually a number of years. Interest is not
usually paid until the certificates are redeemed by the bank at the end of
this period.
Banks are required to provide the IRS and the person redeeming the bearer
certificate with a Form 1099─INT.
Certificates of deposit issued after 1982 are generally required to be in
registered form.
For more information about interest income from certificates of deposit, see
Original Issue Discount (OID) in Publication 550.
Market discount bonds. A market discount bond is any bond having market
discount except:
1) Short-term obligations (those with fixed maturity dates of up to one
year from the date of issue),
2) Tax-exempt obligations,
3) U.S. Savings Bonds, and
4) Certain installment obligations.
Market discount arises when the value of a debt obligation decreases after
its issue date, generally because of an increase in interest rates. If you
buy a bond on the secondary market, it may have market discount.
If you dispose of a market discount bond issued after July 18, 1984, you
generally must recognize the gain as interest income to the extent of the
bond's accrued market discount. The balance of the gain is capital gain
if the bond was a capital asset. For more information about the methods
of figuring accrued market discount, see Market Discount Bonds in
Publication 550.
Discount on short-term obligations. Certain holders of short-term obligations
are required to accrue and include the discount on such obligations in current
income. See Discount on Short-Term Obligations in Publication 550 for more
information.
REMIC regular interests. If you are the holder of a regular interest in a real
estate mortgage investment conduit (REMIC), or an interest in a collateralized
debt obligation (CDO), that interest is considered to be a debt instrument
for income tax purposes, whether or not it is in the form of a debt instrument.
Accordingly, the OID, market discount, and income-reporting rules that apply
to bonds and other debt instruments apply to such interests with certain
modifications. For more information, see REMICs and Other CDOs in Publication
550.
State or Local Government Obligations
Generally, interest on obligations of state or local governments is tax
exempt. This includes obligations of a state or one of its political
subdivisions, the District of Columbia, a possession of the United States,
or one of its political subdivisions, used to finance governmental operations.
This includes interest on certain obligations issued after 1982 by Indian
tribal governments recognized by the Secretary of the Treasury as having
the right to exercise one or more sovereign powers.
If you receive a Form 1099─INT for interest paid on a tax-exempt obligation,
see Tax-exempt interest income under How to Report Interest Income.
Interest on arbitrage bonds issued by state or local governments after
October 9, 1969, and interest on private activity bonds generally is taxable.
For more information on whether such interest is taxable or tax exempt, see
State or Local Government Obligations in Publication 550.
Information reporting requirement. If you received or accrued any tax-exempt
interest income (such as interest on certain state and municipal bonds), you
must show that interest on your tax return if you are required to file. This
is an information reporting requirement and does not convert tax-exempt
interest to taxable interest. See How to Report Interest Income, later.
When to Report Interest Income
When you report your interest income depends on whether you use the cash
method or the accrual method of reporting income.
Cash method. If you use this method, you report your interest income in
the year in which you actually or constructively receive it. Most individual
taxpayers use this method. However, there are special rules for OID and
certain U.S. Savings Bonds. See U.S. Savings Bonds, and Original Issue
Discount (OID), earlier.
Example. On September 1, 1990, you loaned $2,000 at 12% a year. The note
stated that principal and interest would be due on August 31, 1992. In 1992,
you received $2,480 ($2,000 principal and $480 interest). If you use the cash
method, you must include in income on your 1992 return the $480 interest you
received in 1992.
You constructively receive income when it is credited to your account or
made available to you. You do not need to have physical possession of it.
For example, you are considered to receive interest, dividends, or other
earnings on any deposit or account in a bank, savings and loan, or similar
financial institution, or interest on life insurance policy dividends left
to accumulate, when they are credited to your account and subject to your
withdrawal. This is true even if they are not yet entered in your passbook.
You constructively receive income on the deposit or account even if you must:
1) Make withdrawals in multiples of even amounts,
2) Give a notice to withdraw before making the withdrawal,
3) Withdraw all or part of the account to withdraw the earnings, or
4) Pay a penalty on early withdrawals, unless the interest you are to
receive on an early withdrawal or redemption is substantially less
than the interest payable at maturity.
You constructively receive interest when it is credited to your account under
a long-term savings plan that does not let you withdraw interest until a
specified date, if the plan lets you freely withdraw your deposits of
principal.
Accrual method. If you use this method, you report your interest income when
you earn it, whether or not you have received it.
Example. If, in the above example, you use the accrual method, you must
include the interest in your income as you earn it. You would report the
interest as follows: 1990, $80; 1991, $240; and 1992, $160.
Coupon bonds. Interest on coupon bonds is taxable in the year the coupon
becomes due and payable. It does not matter when you mail the coupon for
payment.
How to Report Interest Income
Generally, you report all of your taxable interest income on line 8a, Form
1040; line 8a, Form 1040A; or line 2, Form 1040EZ. If your interest income is
more than $400 or you are excluding interest under the Education Savings Bond
Program, you cannot use Form 1040EZ. Instead, you must complete the schedules
for Form 1040A or Form 1040, as described later. In addition, you must use
Form 1040 under certain circumstances described later.
Form 1099─INT. Your taxable interest income, except for interest from U.S.
Savings Bonds and Treasury obligations, is shown in Box 1 of Form 1099─INT.
Add this amount to any other taxable interest income you received.
If you had any tax-exempt interest income, or exempt-interest dividends from a
mutual fund, you should report the total of this tax-exempt income on line 8b
of Form 1040A or Form 1040. If you file Form 1040EZ, write "TEI" in the space
to the left of line 2 on Form 1040EZ. After "TEI," show the amount of your
tax-exempt interest, but do not add tax-exempt interest in the total on Form
1040EZ, line 2.
If you forfeited interest income because of the early withdrawal of a time
deposit, the deductible amount will be shown on Form 1099─INT in Box 2 (early
withdrawal penalty). If an amount appears in Box 2, you should file Form 1040
and report this amount on line 28 (penalty on early withdrawal of savings).
Box 3 of Form 1099─INT shows the amount of interest income you received
from U.S. Savings Bonds, Treasury bills, Treasury notes, and Treasury bonds.
Include the amount shown in Box 3 in your total taxable interest income,
unless it includes an amount previously included in interest income. If you
are redeeming U.S. Savings Bonds you bought after 1989 and you have qualified
educational expenses, see Form 8815, later. If part of the amount shown in Box
3 was previously included in interest income, see Interest from U.S. Savings
Bonds, next.
If you were subject to backup withholding because, for example, you did not
furnish your social security number to a payer, an amount will appear in Box
4 of Form 1099─INT (federal income tax withheld). Report the amount from Box
4 on Form 1040A, line 28a, or on Form 1040, line 54 (federal income tax
withheld), and check the box.
If there are entries in Boxes 5 and 6 of Form 1099─INT, you must file Form
1040. Report the amount shown in Box 5 (foreign tax paid) on Form 1116,
Foreign Tax Credit, unless you claim this amount on Schedule A of Form 1040 as
other taxes. For more information on the credit and deduction, see Publication
514, Foreign Tax Credit for Individuals.
Interest from U.S. Savings Bonds. If you received a Form 1099─INT for U.S.
Savings Bond interest, the form may show interest you are not required to
report. See Form 1099─INT for U.S. Savings Bonds interest, earlier, under
U.S. Savings Bonds.
If you have qualified education expenses (as discussed earlier under
Education Savings Bond Program), see Form 8815, later, for information
on your interest exclusion.
You should show on line 1, Part I of Schedule B (Form 1040), or on line 1,
Part I of Schedule 1 (Form 1040A), all the interest shown on your Form
1099─INT.
If Form 1099─INT includes interest you previously reported, make the following
adjustment. On Schedule B, several lines above line 2, enter a subtotal of all
interest listed on line 1. If you use Form 1040A, enter this subtotal several
lines above line 2, Part I of Schedule 1. Below the subtotal write "U.S.
Savings Bond Interest Previously Reported," and enter amounts previously
reported or interest accrued prior to receiving the bond. (To figure
the amount to enter for interest reported or being reported as a taxable
distribution from a retirement or profit-sharing plan, see Interest from U.S.
Savings Bonds in Publication 550.) Subtract these amounts from the subtotal
and enter the result on line 2 of Schedule B (Form 1040) or on line 2, Part I
of Schedule 1 (Form 1040A).
Form 8815. Use Form 8815, Exclusion of Interest From Series EE U.S. Savings
Bonds Issued After 1989, to figure your interest exclusion when you redeem
bonds and pay qualified higher educational expenses during the same year.
For more information on the exclusion and qualified higher educational
expenses, see the earlier discussion under Education Savings Bond Program.
You do not qualify for the exclusion if you are married filing separately.
You must show your total interest from Series EE Savings Bonds on line 6 of
Form 8815 and on line 1 of either Schedule 1 (Form 1040A) or Schedule B (Form
1040). After completing Form 8815, enter the result from line 14 (Form 8815)
on line 3 of Schedule 1 (Form 1040A) or line 3 of Schedule B (Form 1040).
Form 1040A
If your taxable interest income totals more than $400 or you are claiming the
interest exclusion under the Education Savings Bond Program, you must complete
Part I of Schedule 1 (Form 1040A). List each payer's name and the amount of
interest income received from each payer. If you received a Form 1099─INT
or Form 1099─OID from a brokerage firm, list the brokerage firm as the payer.
Attach Schedule 1 to your return.
However, you must use Form 1040 instead of Form 1040A if:
∙ You are reporting OID in an amount greater or less than the amount shown
on Form 1099─OID,
∙ You received or paid accrued interest on securities transferred between
interest payment dates,
∙ You acquired taxable bonds after 1987 and choose to reduce interest
income from the bonds by any amortizable bond premium (see Bond Premium
Amortization in Publication 550), or
∙ You forfeited interest income because of the early withdrawal of a time
deposit.
Nominee distributions (Form 1040A). If the total interest income you list
on line 1, Part I of Schedule 1 (Form 1040A), includes any amount that you
received as a nominee for the real owner, show such an amount separately
below a subtotal of all interest income listed. Identify the amount as
"Nominee Distribution," and subtract it from the interest income subtotal.
Report the result on line 2, Part I of Schedule 1.
For more information, see Nominee distributions and accrued interest later
under Form 1040.
Tax-exempt interest income (Form 1040A). If you received any tax-exempt
interest, such as from state or local governmental obligations, do not include
this income on line 8a. Instead, enter your tax-exempt interest on line 8b.
Also include on line 8b any exempt-interest dividends received from a mutual
fund or other regulated investment company.
Interest earned on an individual retirement arrangement (IRA) is tax deferred
rather than tax exempt. Do not include such amount in tax-exempt interest.
If you are completing Part I of Schedule 1, include the tax-exempt interest on
line 1 only if you received a Form 1099─INT for that interest. Several lines
above line 2, put a subtotal of all interest income. Below this subtotal,
write "Tax-Exempt Interest," and show the amount of this interest. Subtract
this amount from the subtotal, and write the remainder on line 2 of Part I.
Subtract the amount you figured on Form 8815 on line 3 from the amount on line
2, and enter the result on Line 4 of Schedule 1 and on line 8a of Form 1040A.
Be sure to show the tax-exempt interest on line 8b.
Frozen deposits (Form 1040A). If you receive a Form 1099─INT for interest
on deposits that you could not withdraw at the end of 1992, you can choose
to exclude such amounts from your gross income, as explained earlier under
General Information. If you make this choice, do not include this income on
line 8a. If you are completing Part I of Schedule 1, include on line 1 the
interest shown on Form 1099─INT. Several lines above line 2, put a subtotal
of all interest income. Below this subtotal, write "Frozen Deposits," and show
the amount of interest that you are excluding. Subtract this amount from the
subtotal and write the result on line 2 of Part I.
Form 1040
If your taxable interest income is more than $400 or you are claiming the
interest exclusion under the Education Savings Bond Program, and you file Form
1040, you must attach a Schedule B to your return and list each payer's name
and the amount received from each.
First, report on line 1, Part I of Schedule B, any interest income from
seller-financed mortgages. After the payer's name, write "SFM." Then, report
on line 1, Part I of Schedule B (Form 1040), all other taxable interest you
received. Include the total amount of interest income that is shown in Box 1
and Box 3 of any Form 1099─INT or in Box 1 and Box 2 of any Form 1099─OID that
you receive for the tax year, and other interest income received for which you
did not receive a Form 1099. List each payer's name and the amount of interest
received from each. If you received a Form 1099─INT or Form 1099─OID from
a brokerage firm, list the brokerage firm as the payer. If you received more
than $400 in taxable interest, you must also complete Part III of Schedule B
(Form 1040). See Foreign financial accounts and foreign trusts, discussed in
Chapter 1.
If you redeemed Series EE U.S. Savings Bonds and you have qualified
educational expenses, complete and attach Form 8815. Enter the result from
line 14 of Form 8815 on line 3 of Schedule B. See Education Savings Bond
Program and Form 8815 earlier for more information.
Tax-exempt interest income (Form 1040). If you received any tax-exempt
interest income (such as interest on certain state and municipal bonds),
you must report the total amount of that interest on line 8b of Form 1040.
Also report on line 8b any exempt-interest dividends that you received from
a mutual fund or other regulated investment company. Do not include this
interest in your taxable interest income on line 8a. If you are completing
Part I of Schedule B (Form 1040), report tax-exempt interest on line 1 only
if you received a Form 1099─INT for that interest. Several lines above line 2,
put a subtotal of all interest income listed on line 1. Below this subtotal,
write "Tax-Exempt Interest," and show the amount of interest that you are
excluding. Subtract this amount from the subtotal and enter the remainder on
line 2. Be sure to also show the tax-exempt interest on Form 1040, line 8b.
Interest earned on an individual retirement arrangement (IRA) is tax deferred
rather than tax exempt. Do not include such amount in tax-exempt interest.
Frozen deposits (Form 1040). If you receive a Form 1099─INT for interest on
deposits that you could not withdraw at the end of 1992, you can choose
to exclude such amounts from your gross income, as explained earlier under
General Information. If you make this choice, do not include this income on
line 8a. If you are completing Part I of Schedule B, include the full amount
of interest shown on your Form 1099─INT on line 1. Several lines above line
2, put a subtotal of all interest income. Below this subtotal, write "Frozen
Deposits," and show the amount of interest that you are excluding. Subtract
this amount from the subtotal and write the remainder on line 2, Part I of
Schedule B.
Nominee distributions and accrued interest (Form 1040). If the total interest
income you list on line 1, Part I of Schedule B, includes any amount that you
received as a nominee for the real owner or that reflects accrued interest
paid on a bond that you bought between interest payment dates, show such an
amount separately below a subtotal of all interest income listed. Identify the
amount as "Nominee Distribution," or "Accrued Interest," as appropriate, and
subtract it from the interest income subtotal. Report the remainder on line 2,
Part I of Schedule B.
Interest on a joint account. If you receive a Form 1099─INT which shows your
taxpayer identification number and names two or more recipients or includes
amounts belonging to another person, you must file a Form 1099─INT with the
IRS to show the proper distributions of the amounts shown. Complete a Form
1099─INT and Form 1096, Annual Summary and Transmittal of U.S. Information
Returns, and file both forms with your Internal Revenue Service Center. Give
the other person(s) Copy B of the Form 1099─INT which you filed as a nominee.
On Form 1099─INT and Form 1096, you should be listed as the "Payer." Prepare
one Form 1099─INT for each other owner and show that person as the "Recipient."
You are not required, however, to file Form 1099─INT to show payments for
your spouse. For more information about the reporting requirements and the
penalties for failure to file (or furnish) certain information returns, see
1992 Instructions for Forms 1099, 1098, 5498, and W─2G.
Example. You receive a Form 1099─INT for 1992 that shows a total of $1,500 of
interest income earned on a savings account that you hold jointly with your
sister. You each have agreed to share the yearly interest income in proportion
to the amount that each of you has invested, even though your identification
(social security) number was submitted to the bank for its recordkeeping
purposes. Your sister has deposited 30% of the amount invested in this
account. As a result, you are considered to be a nominee on behalf of the
amount of interest income belonging to your sister. For 1992, this amount
is $450, or 30% of the total interest of $1,500.
You must provide your sister with a Form 1099─INT no later than January 31,
1993, showing $450 of interest income that she earned for 1992. You must
also send a copy of the nominee Form 1099─INT, along with Form 1096, to the
Internal Revenue Service Center no later than February 28, 1993. Show your own
name, address, and identification number as the "Payer" on the Form 1099─INT.
Provide the same information for your sister in the blocks provided for
identification of the "Recipient."
When you prepare your own 1992 federal income tax return, report the total
amount of interest income, $1,500, on line 1, Part I of Schedule B (Form
1040), and identify the name of the bank which paid this interest. Show the
amount belonging to your sister, $450, as a subtraction from the subtotal
of all interest on Schedule B and identify this subtraction as a "Nominee
Distribution." (Your sister will report the $450 of interest income on her own
tax return, if she is required to file a return, and identify you as the payer
of that amount.)
Original issue discount (OID). If you are reporting OID in an amount greater
or less than the amount shown on Form 1099─OID, or other written statement
(such as for a REMIC regular interest), include the full amount of OID shown
on your Form 1099─OID or other statement on line 1, Part I of Schedule B (Form
1040). If the OID to be reported is less than the amount shown on Form 1099─
OID, follow the earlier reporting rules for nominee distributions or accrued
interest, as applicable, so that you will report only the OID you are required
to report. Below the subtotal, write "OID Adjustment," and show the OID you
are not required to report. If the OID to be reported is greater than the
amount shown on Form 1099─OID, show the additional OID separately below a
subtotal of all interest income listed. Identify the amount as "OID
Adjustment," and add it to the interest income subtotal.
Market discount. Report as interest any gain on the sale (or other
disposition) of certain market discount bonds, to the extent of the accrued
market discount. See Market discount bonds, under Original Issue Discount
(OID) earlier.
Penalty on early withdrawal of savings. If you withdraw funds from a time
savings account before maturity, you may be charged a penalty. You must report
the gross amount of interest paid or credited to your account during the year,
without subtracting the penalty. You deduct the penalty on line 28, Form 1040.
Deduct the entire penalty even if it exceeds your interest income. The Form
1099─INT or similar statement given to you by the financial institution will
show the gross amount of interest and the penalty.