Unit 5: Investment Income and Expenses Flashcards
Interest income is generally reported to the taxpayer on ___ by the financial institution or another payor if the amount of interest is:
Form 1099-INT; $10 or more
General rule for reporting interest income
All taxable interest income must be reported
If taxable interest income exceeds $1,500 the taxpayer must report the interest on
Schedule B, Interest and Ordinary dividends
What are the rules when the taxpayer receives noncash gifts or services for opening a bank account?
For deposits less than $5000, more than $10 must be reported as interest
For deposits of $5,000 or more, more than $20 must be reported as interest
What is the rule on Interest earned on a CD?
Include the interest earned in income.
Interest earned on debt obligations of state and local governments is generally exempt from
federal income tax
Interest on federally guaranteed state and local obligations is generally
taxable
Rules of reporting tax-exempt interest
must be reported on Form 1040 even though it is not taxable
Interest on US obligations is normally taxable for
federal income tax purposes
Individual taxpayers can generally report interest income from Series EE or I savings bond either:
when the bond matures or is redeemed (whichever occurs first), or each year as the bond’s redemption value increases
What is the general rule for reporting interest income from Series EE or I savings bonds?
use the same reporting method for all the Series EE and Series I bond owned
If you itemize deductions and paid interest to meet the minimum required deposit for a certificate of deposit, what can you do?
ou can deduct the interest paid as investment interest, up to the net investment income using Form 4952, Investment Interest Expense Deduction
What is the Education Savings Bond Program
A program that allows a taxpayer to be able to exclude interest from income all or part of the interest received on redemption of qualified US savings bonds during the year if they pay qualified higher-education expenses for themselves, spouse, or dependents
The taxpayer must use both the __ and __ to pay for qualified education expenses
principal and interest
To exclude interest earnings on Series EE and I bonds, a taxpayer must at least be __ years old before the bond’s issue date
24
Certain rules must be followed for the education exclusion to qualify:
bonds must be purchased by the owner
qualified higher-education expenses must be reduced by certain-tax free benefits received and by expenses used to claim the American Opportunity and Lifetime Learning Credits
the total interest received may be excluded only if the combined amounts of the principal and interest received do not exceed the taxpayer’s qualified higher education expenses
married taxpayers whole separately do not qualify
$10,000 of savings bonds proceeds were redeemed with $8000 principal and $2000 interest.
$8000 of those proceeds were only used for qualified educational expenses. How much of the interest can be excluded from income and how much is taxable?
Since $8,000 is only used out of $10,000 in proceeds or 80% use, $1,600 (or 80% $2,000) will be
exempt from interest income while $400 is taxable
What form is used by the payor to report dividend income to taxpayers?
Form 1099-DIV
If a taxpayer does not receive Form 1099-DIV, he must
report all taxable dividend income
If dividend income is more than $1,500 he must report on ___ . Otherwise, it can be reported directly on
Schedule B, Interest and Ordinary Dividends; Form 1040
Ordinary dividends are:
corporate distributions in cash paid to shareholders out of earnings and profits
how are ordinary dividends taxed?
ordinary income tax rates
How are qualified dividends taxed?
at lower capital gain rates
What is the maximum tax rate for qualified dividends?
20%
In order for dividends to qualify to be taxed at lower capital gains rates, what are the two most common requirements that must be met:
the dividends must be paid by a US corporation or a qualified foreign corporation and
the taxpayer must hold the stock for more than sixty days during the 121-day period that begins sixty days before the the ex-dividend date
What are nondividend distributions?
these are distributions not paid out of earnings and profits but considered a recovery or return of capital
What does a nondividend distribution do the taxpayer’s basis in the stock?
they reduce the basis in the stock
What does stock dividend do to shareholder’s income in the year of distribution?
it does not affect the income
What happens when a stock dividend is granted?
the basis of the individual shares is adjusted by the inclusion of newly issued shares
What happens if a shareholder has the option to receive cash instead of stock if a stock dividend is granted?
the stock dividend is taxable in the year and the FMV of the stock is included in gross income
If a taxpayer uses his dividends to buy more stock at a price equal to its FMV, he must
still report the dividends as income
If some plans allow taxpayers to invest cash dividends to buy shares of stock at price less than fair market value, the taxpayer must report:
dividend income on the difference between the cash he invests and the FMV of the stock he purchases
A taxpayer who receives mutual fund distributions during the year will also receive:
Form 1099-DIV
How are mutual fund distributions reported?
based on the character of the income source
Capital gain distributions from a mutual fund are always:
treated as long-term
If a mutual fund or REIT declares a dividend payable in the year but not actually paid until next year, when are they reported?
the dividends are reported in the year declared
How are nondividend distributions taxed?
they are generally not taxed but once the Tp’s basis in the stock is reduced to zero, additional distributions are considered capital gains and are taxed as such
