Ch 5 - Questions (Interest and Dividends)

Question 1

What are some sources of interest?

Answer 1

Banks pay interest on customer deposits. Government and corporations pay interest on bonds they issue. Insurance companies pay interest on money left on deposit.

Question 2

Taxable Interest or not?

Interest paid by banks, S&L associations, credit unions for savings accounts, checking accounts, CDs.

Answer 2

Taxable, as accrued

Question 3

Taxable Interest or not?

Interest paid by banks and corporations for certain short-term corporate obligations.

Answer 3

Taxable, at maturity

Question 4

Taxable Interest or not?

Interest paid by the US Treasury for Series E or EE bonds, Series I bonds.

Answer 4

Taxable, in the year these events occur:

Redeem (cash in) the bond.

Give up ownership and the bond is reissued

The bond reaches final maturity and stops earning interest.

Not taxable if proceeds from qualified bonds are used to pay qualified higher education expenses.

Question 5

Taxable Interest or not?

Interest paid by US Treasury for Series H or HH bonds.

Answer 5

Taxable, as accrued

Question 6

Taxable Interest or not?

Interest paid by US Treasury for Treasury bills.

Answer 6

Taxable, at maturity

Question 7

Taxable Interest or not?

Interest paid by US Treasury on Treasury Notes/ Bonds, and all others

Answer 7

Taxable, as accrued

Question 8

Taxable Interest or not?

Interest paid by mutual funds on exempt-interest dividends

Answer 8

Not taxable, but still reportable

Question 9

Taxable Interest or not?

Interest paid by corporations and utilities on corporate bonds

Answer 9

Taxable, as accrued

Question 10

Taxable Interest or not?

Interest paid by state/local governments on Municipal bonds.

Answer 10

Not taxable, but still reportable

Question 11

Taxable Interest or not?

Interest paid by the borrower on personal loans/notes

Answer 11

Taxable, as received.

Question 12

Taxable Interest or not?

Interest paid by purchaser on sales contracts.

Answer 12

Taxable, as received.

Question 13

Taxable Interest or not?

Interest paid by an insurance company on Insurance dividends left on deposit.

Answer 13

Taxable, as accrued.

Question 14

Taxable Interest or not?

Interest paid by US/state/local government on overpaid income tax.

Answer 14

Taxable, in the year received.

Question 15

Payers of interest are generally required to report payments beyond how much?

Answer 15

$10 or more

Question 16

What form does a recipient of interest receive?

Answer 16

1099-INT

Question 17

Is interest under $10 taxable if no form is received?

Answer 17

Yes

Question 18

What is Schedule B

Answer 18

The schedule used if a taxpayer receives taxable interest more than $1500.

Question 19

If a taxpayer receives $1500 or less in taxable interest, how is it reported?

Answer 19

On the tax form (no schedule B needed) directly, if no foreign investment interest is received.

If a taxpayer received any interest on foreign investments, even if total interest is $1500 or less, must use Schedule B and form 1040.

Question 20

Is interest on foreign investments taxed the same as domestic?

Answer 20

Yes.

Question 21

Does investing in US mutual funds that hold foreign debt instruments constitute and interest in a foreign account for tax purposes?

Answer 21

No.

Question 22

If a taxpayer owned financial interest in or signature authority over a financial account in a foreign country (e.g. bank account, securities account, brokerage account) what form may they have to file?

Answer 22

FinCEN form 114, Report of Foreign Bank and Financial Accounts, and/or Form 8938, Statement of Specified Foreign Financial Assets.

Question 23

If a taxpayer received a distribution from or were the grantor or transferor to a foreign trust, what form may they have to file?

Answer 23

Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts.

Question 24

If a taxpayer had ownership or authority over financial assets worth $50000 ($100000 if MFJ) at the end of the year, or exceeds $75000 ($150000 if MFJ) at any time during the year, what form is required?

Answer 24

Form 8938 Statement of Specified Foreign Financial Assets.

Question 25

If a taxpayer is required to file form 8938 Statement of Specified Foreign Financial Assets and does not, what is the penalty?

Answer 25

$10000 penalty

Question 26

What happens if a taxpayer receives interest income that does not actually belong to them. For example, interest on a child’s bank account.

Answer 26

Taxpayer should report nominee interest on Schedule B. Write Nominee Distribution, and subtract from total interest.

Question 27

How is interest in a seller-financed mortgage handled?

Answer 27

The taxpayer must report the buyer’s name, address, and SSN on Schedule B, along with the amount of interest received each year. This interest is taxable.

Question 28

What is the penalty for failure to report interest received for a seller-financed mortgage?

Answer 28

$50 penalty.

Question 29

How is tax-exempt interest reported?

Answer 29

1099 INT and reported on Form 1040 or 1040A line 8b.

Question 30

What is reported on 1099 INT in box 1

Answer 30

amounts paid or credited to the taxpayer’s account.

Question 31

What is reported on 1099 INT in box 2

Answer 31

early withdrawal penalties

Question 32

What is reported on 1099 INT in box 3

Answer 32

Interest from US Savings bonds or other treasury obligations. (Taxable on fed, but generally nontaxable on state)

Question 33

What is reported on 1099 INT in box 4

Answer 33

Any federal income tax withholding (unusual)

Question 34

What is reported on 1099 INT in box 5

Answer 34

Taxpayer’s share of investment expenses from a Real Estate Mortgage Investment Conduit (REMIC)

Question 35

What is reported on 1099 INT in box 6

Answer 35

Foreign tax paid

Question 36

What is reported on 1099 INT in box 7

Answer 36

The country or US Possession to which foreign tax was paid.

Question 37

What is reported on 1099 INT in box 8

Answer 37

Amount of tax-exempt interest received by the taxpayer.

Question 38

What is reported on 1099 INT in box 9

Answer 38

The amount of tax-exempt interest that is subject to the Alternative Minimum Tax (AMT). (This amount is included in box 8 also)

Question 39

Are series E bonds still issued?

Answer 39

No, but taxpayers may still hold them.

Question 40

Are series H and HH bonds still issued?

Answer 40

No, but taxpayers may still hold them.

Question 41

What US Treasury bonds are currently issued?

Answer 41

I and EE

Question 42

When is interest in Series E and EE bonds reported?

Answer 42

The year in which the first of these events occurs:

Taxpayer redeems the bond and receives what the bond is worth, including interest

Taxpayer gives up ownership of the bond and bond is reissued.

The bond stops earning interest because it has reached final maturity.

Question 43

Can a taxpayer report Series E and EE bonds annually?

Answer 43

Yes, they can, by attaching a statement to the tax return. If they do this, it must be done each year.

Question 44

How is series HH bond interest paid and reported

Answer 44

Interest is paid directly to taxpayer twice a year. Must be reported as income the year it is received.

Question 45

What are paid to shareholders of corporations to represent the shareholder’s portion of the corporation’s profits?

Answer 45

Dividends

Question 46

Are credit union dividends and mutual fund exempt-interest dividends the same as other dividends? How are they treated?

Answer 46

They are really interest and treated as interest. exempt-interest dividends are tax exempt.

Question 47

What form is received by the taxpayer when dividends are paid.

Answer 47

Form 1099-DIV

Question 48

What are the most common types of distributions?

Answer 48

Ordinary Dividends (including qualified dividends)

Capital gain distributions

Nontaxable distrubutions

Question 49

What is reported on 1099-DIV Box 1a

Answer 49

Ordinary dividends. These must be reported on Schedule B if total is more than $1500 (of all ord dividends)

Question 50

What is reported on 1099-DIV Box 1b

Answer 50

Qualified dividends (also included in box 1a). They qualify for more favorable tax treatment.

Question 51

What is reported on 1099-DIV Box 2a

Answer 51

Total capital gain distributions.

Question 52

What is reported on 1099-DIV Box 2d

Answer 52

Gain resulting from the sale of collectible items (coins, art) and taxed at a maximum rate of 28%

Question 53

What is reported on 1099-DIV box 3

Answer 53

Nondividend distributions (generally not entered on the tax return)

Question 54

What is reported on 1099-DIV Box 4

Answer 54

Amount of federal income tax withheld from dividends (when payer does not have taxpayer’s identification number). Included in total for Form 1040 line 64 or 1040A line 40.

Question 55

What is reported on 1099-DIV Box 5

Answer 55

Taxpayer’s share of expenses paid by a non-publically offered regulated investment company. Usually empty. Amts are deductible as miscellaneous itemized deduction on Schedule A.

Question 56

What is reported on 1099-DIV Box 6

Answer 56

Foreign tax paid - the amount of foreign tax withheld from dividend income. May be deducted on Schedule A if itemize, or claimed as a foreign tax credit.

Question 57

What is reported on 1099-DIV Box 7

Answer 57

The country to which the foreign tax was paid.

Question 58

What is reported on 1099-DIV boxes 8 and 9?

Answer 58

These only apply to corporations that are in partial or complete liquidation. Cash distributions reported in Box 8, Fair market value of items other than cash distributed as part of liquidation is box 9.

Question 59

Are capital gain distributions characterized as long term or short term?

Answer 59

Long term, regardless of how long a taxpayer has owned them.

Question 60

What are the two treatments of capital gain distributions?

Answer 60

Distributed capital gains are paid in cash to shareholders, or reinvested in additional shares by request.

Undistributed capital gains are retained by the investment company, which pays the tax on them. These are reinvested automatically in additional chares, and reported to taxpayer on Form 2439 rather than 1099-DIV.

Question 61

What form is used for undistributed capital gains?

Answer 61

Form 2439.

Question 62

What do nontaxable distributions represent?

Answer 62

A return of the shareholder’s capital (original investment) generally made because an excess amount of capital has been accumulated by the corporation.

Question 63

Are the returns of capital taxable?

Answer 63

Generally, no.

Question 64

How are qualified dividends and capital gain distributions treated?

Answer 64

As long-term capital gains.

Question 65

What is long-term capital gain treatment?

Answer 65

Generally reserved for gain from sales or other exchanges of securities held for more than one year.

Question 66

What is the maximum tax rate on qualified dividends (2017)?

Answer 66

0% on any amount that would otherwise be taxed at a 10% or 15% rate.

15% on any amount that otherwise would be taxed at rates greater than 15% but less than 39.6%

20% on any amount that would otherwise be taxed at the 39.6% rate.

Question 67

Where are capital gains and losses reported?

Answer 67

Schedule D. However if a taxpayer has only qualified dividends and normal capital gains distributions reported on form 1099-DIV then they may use the Qualified Dividends and Capital Gain Tax Worksheet.

Question 68

Besides the $1500 threshold for filing Schedule B, what are other things that would require Schedule B?

Answer 68

If the taxpayer received any of the following:

Interest not properly attributable to the taxpayer (e.g. minor child)

Interest on a seller-financed mortgage

Interest from US Savings Bonds that is being excluded from income.