Reporting Interest Income to IRS

Interest and Dividend Income Received During 2023 Must be Reported on Form 1040

Individuals filing their 2023 federal income tax return must report all interest income (including tax-exempt interest income) and dividend income they received during 2023 on IRS Form 1040 line 2 and line 3, respectively, as shown here:

This column discusses specific reporting requirements with respect to interest and dividend income received during 2023.

Reporting Interest Income to IRS

Individuals who earned more than $10 of interest during 2023 from any institution (a bank, a brokerage, an insurance company) in a non-retirement account should have received IRS Form 1099-INT from that institution. Below is a sample 2023 Form 1099-INT:

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IRS Schedule B (Interest and Ordinary Dividends) (see below) must be filed by an individual if any of the following apply to that individual: (1) Received over $1,500 of taxable interest income; (2) Is claiming the exclusion of Series EE or I Savings Bond interest used to pay higher education expenses; (3) Received over $1,500 of taxable ordinary dividends; (4) Owns a foreign account or received distributions from a foreign account, or is grantor to a foreign trust; (5) Received interest or ordinary dividends as a “nominee”; (6) Received interest as part of a seller-financed mortgage used by the buyer as a personal residence; (7) Received accrued interest; or (8) Is reporting discrepancy from an amount reported on Form 1099-INT or Form 1099-DIV.

Interest and Ordinary Dividends Schedule B (Form 1040)

Bank/Brokerage 1099-INTs and 1099-DIV Corrections

One of the annoyances and stresses of the tax preparation business has been Form 1099-INTs and Form 1099-DIVs issued by banks and brokerages. The IRS refuses to require a standardized Form 1099 for interest and dividends issued by banks and brokerage companies, thereby requiring multiple redundant reporting for Form 1040 filing. Yet the IRS allows brokerage companies to issue corrected Form 1099s for months past the due date of individual receipt of the Form 1099 (the deadline is between February 1 and February 15).

Nominee Interest

The receipt of a Form 1099-INT that is in an individual’s name with his or her Social Security number, but which in reality belongs to another individual (the other individual was the recipient of the interest income) is called “nominee interest”. The individual who received the Form 1099-INT should report the interest in full on Schedule B, and then enter “Nominee Distribution,” subtracting this amount from the total amount of interest. Form 1099-INT should be reissued to the nominee with the nominee’s name and Social Security number and the amount of interest.

Accrued Interest

When bonds are bought between interest payment dates, the bond purchaser has to pay accrued interest (interest that has accrued since the last pay date) to the bond seller. The amount of accrued interest is taxable to the bond seller and deductible by the bond purchaser. In particular, the bond purchaser deducts the amount of accrued interest on Schedule B as “Accrued Interest” against the amount bond related interest income. The two amounts should not be netted. The amounts should be reported separately as “bond interest” and “accrued interest,” reported as a negative amount.

“Dividends” That Are Reported As “Interest”

Dividends received from the following institutions are reported the same as reporting interest income to IRS on Schedule B:

(1) Cooperative banks;
(2) Credit unions;
(3) Building and loan associations;
(4) Savings and loan associations;
(5) Homestead associations;
(6) Federal savings and loan associations; and
(7) Mutual savings banks (not having capital stock represented by shares).

Certificates of Deposits (CDs)

Interest earned on certificates of deposits (CD’s) is taxable each year the interest is earned, even though the cash earned is not withdrawn until a later year. The exception is interest income from CDs maturing in one year or less. In that case, interest income is recognized when the CDs mature, which enables individuals to defer income recognition until cash (interest earned) is received. The same is true for US Treasury Bill obligations which also have a term of one year or less.

Reporting Interest Income to IRS - Other

Life insurance policy dividends. Interest on life insurance policy dividends left on deposit with an insurance company that can be withdrawn annually is taxable in the year it is credited to the account. This is true unless the interest can be withdrawn only on the anniversary date of the policy, or other specified date, in which case the interest is taxable in the year that date occurs.
Interest paid by the IRS on federal income tax refunds. Interest paid on federal income tax refunds is taxable, but only for federal income tax purposes.
Gifts for opening a bank account - For deposits of less than $5,000, gifts or services valued at more than $10 must be reported as interest. For deposits of $5,000 or more, gifts or services valued at more than $20 must be reported as interest. The cost is determined by the cost to the financial institution.

Reporting Dividend Income

Individuals who received dividends during 2023 from any institution (a brokerage, a corporation an insurance company) in a non-retirement account should have received a Form 1099-DIV from that institution. A sample blank 2023 Form 1099-DIV is shown here:

Total ordinary dividends reported in Box 1a of IRS Form 1099-DIV are reported on line 3b of Form 1040 (see above). If ordinary dividends exceed $1,500 then ordinary dividends must be reported on Schedule B. The portion of total ordinary dividends that qualifies for the lower capital gains tax rates is reported in Box 1b of Form 1099-DIV as “qualified dividends”. Qualified dividends are entered on Line 3a of Form 1040 as shown above.

What Are Qualified Dividends (Box 1b of Form 1099-DIV)?

Qualified dividends are taxed at a reduced tax rate called a “preferential” tax rate (0 percent, 15 percent or 20 percent). To qualify for the preferential or reduced federal tax rate, a dividend must be received on a stock held for at least 61 days in the 121-day period beginning 61 days before “ex-dividend” date. Dividends are paid to those shareholders who own stock on the “ex-dividend” date. A corporation always announces what the “ex-dividend” date is, no matter how many times during the year the corporation pays dividends on its stock. In general, the actual payment of a dividend is made after the “ex-dividend” date. That means that the date a stock shareholder receives a dividend is not the date that should be used in determining the holding period.

The reduced (“preferential”) federal tax rates apply to dividends received from:

(1) Domestic corporations;
(2) Certain qualified foreign corporations; and
(3) “Open-End” (mutual) funds or other regulated investment companies, partnership, real estate investment trusts (REITs), or common trust funds. Special rules apply to determine qualified dividends from a REIT.

Dividends from Life Insurance Policies

Dividends on certain life and casualty insurance policies are a return of premium and not income until the amount and the dividends received exceed the policyholder’s total insurance premiums paid.

Non-Dividend Distributions (Form 1099-DIV, Box 3)

Nontaxable corporate stock distributions are not taxed until the cost of the stock is recovered. The cost of the stock is reduced by these distributions. After the cost is recovered, these distributions are taxable as capital gains.

Section 199A Dividends (Form 1099-DIV, Box 5)

Box 5 of Form 1099-DIV reports qualified REIT dividends that the REIT shareholder received that are eligible for an Internal Revenue Code (IRC) Section 199A deduction for qualified business income. A qualified REIT dividend is any capital gain dividend or a qualified dividend. A qualified REIT dividend is also included in Box 1a of Form 1099-DIV, the total ordinary dividends.

Employees and retirees who have any problems or questions with regard to the reporting of any interest or dividends that they received during 2023 on their 2023 federal income tax return should contact a tax professional.

Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street - Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.