You must give your name and TIN (either a social security number (SSN), an employer identification number (EIN), or an individual tax identification number (ITIN)) 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 and dividends. If you do not give your TIN to the payer, you may have to pay a penalty. In addition, if you do not provide a certified TIN on Form W-9, Request for Taxpayer Identification Number and Certification, the payer must backup withhold on your interest payments, at a rate of 24%.
Your investment income generally is not subject to regular withholding. However, it may be subject to backup withholding to ensure that income tax is collected on the income. The bank, broker, or other payer of interest, original issue discount (OID), dividends, cash patronage dividends, or royalties must withhold income tax on these reportable payments at a rate of 24% under backup withholding.
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For new accounts paying interest or dividends, you must certify under penalties of perjury that your TIN is correct and that you are not subject to backup withholding. Your payer will give you a Form W-9, Request for Taxpayer Identification Number and Certification, or similar form, to make this certification. If you fail to make this certification, backup withholding may begin immediately on your new account or investment.
If you have been notified that you underreported interest or dividends, you can request a determination from the IRS to prevent backup withholding from starting or to stop backup withholding once it has begun. You must show that at least one of the following situations applies.
If two or more persons hold property (such as a savings account, bond, or stock) as joint tenants, tenants by the entirety, or tenants in common, each person's share of any interest or dividends from the property is determined by local law.
Form 1099-DIV, box 11, shows exempt-interest dividends from a mutual fund or other regulated investment company paid to you during the calendar year. See the Instructions for Form 1040 or 1040-SR for where to report.
Interest on insurance dividends left 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 policies and on National Service Life Insurance policies.
Money market funds are offered by nonbank financial institutions such as mutual funds and stock brokerage houses, and pay dividends. Generally, amounts you receive from money market funds should be reported as dividends, not as interest.
Interest on insurance dividends left on deposit with an insurance company that can be withdrawn annually is taxable to you in the year it is credited to your account. However, if you can withdraw it only on the anniversary date of the policy (or other specified date), the interest is taxable in the year that date occurs.
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.
Total your tax-exempt interest (such as interest or accrued OID on certain state and municipal bonds, including zero coupon municipal bonds) reported on Form 1099-INT, box 8, and Form 1099-OID, box 11, and exempt-interest dividends from a mutual fund or other regulated investment company reported on Form 1099-DIV, box 11. Add these amounts to any other tax-exempt interest you received. Report the total on line 2a of Form 1040 or 1040-SR.
Dividends can be distributions of money, stock, or other property paid to you by a corporation or by a mutual fund. You also may receive dividends through a partnership, an estate, a trust, or an association that is taxed as a corporation. However, some amounts you receive called dividends actually are interest income. See Dividends that are actually interest, earlier.
Certain substitute payments in lieu of dividends or tax-exempt interest received by a broker on your behalf must be reported to you on Form 1099-MISC, Miscellaneous Information, or a similar statement. See also Reporting Substitute Payments, later.
If a mutual fund (or other regulated investment company) or real estate investment trust (REIT) declares a dividend (including any exempt-interest dividend or capital gain distribution) in October, November, or December, payable to shareholders of record on a date in one of those months but actually pays the dividend during January of the next calendar year, you are considered to have received the dividend on December 31. You report the dividend in the year it was declared.
Exempt-interest dividends you receive from a mutual fund or other regulated investment company are not included in your taxable income. (However, see Information reporting requirement, next.) Exempt-interest dividends should be shown in box 11 of Form 1099-DIV.
Exempt-interest dividends paid from specified private activity bonds may be subject to the alternative minimum tax. The exempt-interest dividends subject to the alternative minimum tax should be shown in box 12 of Form 1099-DIV. See Form 6251 and its instructions for more information.
Insurance policy dividends the insurer keeps and uses to pay your premiums are not taxable. However, you must report as taxable interest income the interest that is paid or credited on dividends left with the insurance company.
If you claim a deduction for investment interest, you may have to reduce the amount of your qualified dividends that are eligible for the 0%, 15%, or 20% tax rate. Reduce it by the qualified dividends you choose to include in investment income when figuring the limit on your investment interest deduction. This is done on the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet. For more information about the limit on investment interest, see Interest Expenses in chapter 3.
If an investment club partnership's activities are limited to investing in savings certificates, stock, or securities, and collecting interest or dividends for its members' accounts, a member's share of income is not earnings from self-employment. You cannot voluntarily pay the self-employment tax to increase your social security coverage and ultimate benefits.
Generally, you can use losses from passive activities only to offset income from passive activities. You cannot use passive activity losses to offset your other income, such as your wages or your portfolio income. Portfolio income includes gross income from interest, dividends, annuities, or royalties that is not derived in the ordinary course of a trade or business. It also includes gains or losses (not derived in the ordinary course of a trade or business) from the sale or trade of property (other than an interest in a passive activity) producing portfolio income or held for investment. This includes capital gain distributions from mutual funds (and other regulated investment companies) and real estate investment trusts.
Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. It also includes property that produces gain or loss (not derived in the ordinary course of a trade or business) from the sale or trade of property producing these types of income or held for investment (other than an interest in a passive activity). Investment property also includes an interest in a trade or business activity in which you did not materially participate (other than a passive activity).
If you are a cash method taxpayer, you can deduct interest on margin accounts to buy taxable securities as investment interest in the year you paid it. You are considered to have paid interest on these accounts only when you actually pay the broker or when payment becomes available to the broker through your account. Payment may become available to the broker through your account when the broker collects dividends or interest for your account, or sells securities held for you or received from you.
This generally includes your gross income from property held for investment (such as interest, dividends, annuities, and royalties). Investment income does not include Alaska Permanent Fund dividends. It also does not include qualified dividends or net capital gain unless you choose to include them.
Investment income includes the part of your child's interest and dividend income you choose to report on your return. If the child does not have qualified dividends, Alaska Permanent Fund dividends, or capital gain distributions, this is the amount on line 6 of Form 8814. Include it on line 4a of Form 4952.
Your 10-year-old child has taxable interest income of $4,000 and Alaska Permanent Fund dividends of $2,000. You choose to report this on your return. You enter $4,000 on Form 8814, line 1a; $2,000 on line 2a; and $6,000 on line 4. You then enter $3,900 on Form 8814, lines 6 and 12; and Schedule 1 (Form 1040), line 8z. You figure the amount of your child's income that you can consider your investment income as follows.
Ted's investment income from interest and dividends (other than qualified dividends) is $10,000. His investment expenses (other than interest) are $3,200. His investment interest expense is $8,000. Ted also has income from the partnership of $2,000.
You cannot deduct interest expenses you incur to produce tax-exempt income, such as interest on money you borrow to buy tax-exempt securities or shares in a mutual fund or other regulated investment company that distributes only exempt-interest dividends.
Your share of the investment expenses of a REMIC or a nonpublicly offered mutual fund, as described above, is considered to be an indirect deduction through that pass-through entity. You must include in your gross income an amount equal to the expenses allocated to you, whether or not you are able to claim a deduction for those expenses. If you are a shareholder in a nonpublicly offered mutual fund, you must include on your return the full amount of ordinary dividends or other distributions of stock, as shown in box 1a of Form 1099-DIV. If you are a residual interest holder in a REMIC, you must report as ordinary income on Schedule E (Form 1040) the total amounts shown on Schedule Q (Form 1066), lines 1b and 3b. If you are a REMIC regular interest holder, you must include the amount of any expense allocation you received on Form 1040 or 1040-SR, line 2b. 2ff7e9595c