Reporting Your Interest Income

If you have interest income, complete this form. The only exception is for interest income you receive from someone who bought a house from you. You'll use the seller-financed mortgage interest statement for the interest you earned on your home sale.

Fill out five worksheets, one for each form you received.

No. We'll take the information you enter and put it on Schedule B, Interest and Dividends, for you. Schedule B is the official IRS form you send in with your tax return.

When you print a copy of your tax return for your records, we'll print out a copy of this worksheet; but when you print out your return for the IRS, or if you file your return electronically, we don't include this worksheet.

Yes. Report your tax-exempt interest income. It might have an effect on your taxes. Here are some examples:

- If you receive tax-exempt income on bonds from a state other than the state you live in, your home state will probably tax your out-of-state tax-exempt income. Our state program will help you with this.

- If you qualify for the earned income credit, too much tax-exempt interest income will disqualify you from receiving the credit.

- If you collect Social Security income, you must add your tax-exempt interest income to your other taxable income to see if you must pay tax on your social security income.

If your income comes from a mutual fund or from investments your broker holds for you, look on the year-end report from your mutual fund company or broker.

If you own municipal bonds and you receive the checks for the interest yourself, add up the amounts you received during the year.

Check your:

* Year-end bank statement

* Checkbook or deposit records

* Any other records you kept on the interest you received

Yes. The IRS has copies of all your Forms 1099-DIV, 1099-INT, 1099-OID, and 1099-B. It's very important that you report the same amounts on your return that your broker, bank, or other person reports to the IRS. The IRS compares the amounts on your return with the copies it has on file.

Yes, you must report your taxable interest income.

Some examples of taxable interest income are:

- Interest on your savings accounts and certificates of deposit

- Interest income you receive on bonds you own, whether from the United States government or from a corporation

- Interest someone else pays you if you've loaned money to them

- "Dividends" reported by Credit Unions are interest income

You'll receive a Form 1099-INT (or your broker or bank's substitute statement) for most taxable interest income you receive.

You probably won't receive a Form 1099-INT if you're receiving interest income from an individual.

Yes. You must report ALL the interest income you received, even if you didn't receive an official notification such as Form 1099-INT.

Here are some examples of when you might not receive a Form 1099-INT:

- If you earn less than $10 on a savings account, your bank isn't required to send you a Form 1099-INT.

- If you loan money to a friend and your friend pays you back, with interest, you won't receive a Form 1099-INT.

- If you sold your house or other property to someone, and that person pays you off a little at a time, with interest, he or she probably won't send you a Form 1099-INT.

Note: If the house you sold is being used by the buyers as their personal residence, don't report the interest here. Instead, enter it on the Seller-Financed Mortgage Statement.

Call your bank and ask them to send you another copy of the form.

If you earned less than $10 in interest, your bank isn't required to send you a form, but you still need to report the income. Report the interest amount from your year-end statement here.

Even though you don't receive a Form 1099-INT for tax-exempt interest, enter the amount you received just as though you had received the form from your bank, broker, or other payer. Unless you hold tax-exempt bonds in your own name, you will find your tax-exempt interest, if any, on your broker or mutual fund statement. If you own tax-exempt bonds and don't hold them in your brokerage account, you may have recorded the amount of your interest income in your checkbook.

Because states have different rules from federal about taxing your tax-exempt investment income, you must divide your tax-exempt income into at least two amounts if any of the income was not from the state where you're a resident. Here are the rules:

- If you received tax-exempt interest from only one state, enter the total you received in box 1 and check the box indicating the interest was tax exempt. We will then ask you for the state where your income originated.

- If you received tax-exempt interest from more than one state, break the total down into two amounts: the interest income from your resident state and the interest income from states other than the one in which you live. Then enter the income from each group on separate Interest Income forms. If you are a part-year resident in two states, follow the same procedure, but break down the income into three groups -- one group for each of your part-year resident states, and the third group for the states where you didn't live. We will ask you for the state where the income originated in each case.

After you enter each interest income amount, be sure to check the box that the interest is tax-exempt for federal taxes.

Yes. If you receive a Form 1099-INT from your insurance policy, this means that your insurance company is paying you interest income on dividends your policy has accumulated. Most companies add the amount of the interest to your policy's cash value or buy additional insurance with it. You have to pay tax on the interest -- even if you don't receive a check for it.

But you DON'T usually have to pay tax on the dividends on your insurance policy. Dividends on a policy usually either reduce your premiums or buy more insurance for you. If your insurance company actually pays you dividends, though, you'll have to pay tax on the amount of the dividends that exceeds the amounts you've paid in premiums.

Include the entire amount of income shown on your Form 1099 and check that you want to adjust these dividends. Then, you'll be asked to enter the amount that doesn't belong to you.

When you receive income that belongs to someone else, you're receiving nominee income. When you make the adjustment to your income, tell us that this is a nominee adjustment.

Unfortunately, this isn't all you have to do. Now you must inform the other person on your joint account, and the IRS, exactly who is supposed to report the amount that doesn't belong to you.

Yes, you have to report it.

Later, when we ask if you used any of the money for qualified educational expenses, be sure to tell us you did. We'll help you fill out Form 8815, Exclusion of Interest from Series EE and I U.S. Savings Bonds Issued after 1989, to see if you qualify to exclude some or all of the interest income from your taxes. If you qualify, we'll take care of the rest and deduct the amount you can exclude.

This is called "backup" withholding and it usually happens when your bank or broker doesn't have your correct social security number.

Most of the time, the solution is simple. Call your bank or broker and ask for the form they use to get your correct social security number on their records. When you receive the form, fill in the information and send it back. In the future, your bank or broker shouldn't withhold income taxes from your interest and dividend earnings.

Yes. You have two choices about how to do this:

* You can take a tax credit (Form 1116, Foreign Tax Credit) and get a dollar-for-dollar reduction of your federal tax bill, OR

* You can deduct the foreign taxes you paid as an itemized deduction on Schedule A, Itemized Deductions.

You MUST make the same choice for all foreign taxes you pay in a single tax year. You can't deduct some and take a credit for the rest.

You're a nominee if you received a Form 1099 for income that actually belongs to somebody besides you or your spouse.

The income reported on this Form 1099 is included in your interest and dividend income on Schedule B. You'll need to make a "nominee adjustment" so that this income is subtracted out of your total interest and dividend income. This means that you won't pay taxes on it.

For example, when you open a savings account at a bank, you are required to give the bank your social security number. If you add someone to your account, the bank will continue to report the interest to the person (you) who originally opened the account, or whoever was named the "primary" owner of the account.

If you received a Form 1099 reporting all the income on an account to you, and it doesn't all belong to you, check the box that says "nominee," and enter the part of the income that doesn't belong to you. You must report this nominee income both to the IRS and to the person that the money actually belongs to.

If you received a Form 1099-INT, Form 1099-DIV, or Form 1099-OID that includes interest or dividends belonging to someone other than you or your spouse, you must send the actual owner a new Form 1099-INT, Form 1099-DIV, or Form 1099-OID.

You must also file a copy of that same form with the IRS along with Form 1096 (Transmittal of Information Return).

You can ask the IRS to send you the forms you need, or you can usually buy them at your local office supply store.

If you use our program and transfer your federal tax data to your state tax return, we will exclude your nominee income from your state taxable income.

This is when you pay more for a bond than its face value. The amount in excess of the face value is called a premium.

You can deduct a part of your premium from your interest income every year. IRS Publication 550, Investment Income and Expenses, outlines the steps you must take to figure the amount of the premium you can deduct each year.

When you sell or redeem your bond, reduce its original cost by the amount of the premium you've deducted.

First, you need to know what "accrued interest" is.

Most bonds pay interest only on pre-specified dates. Generally this is twice a year. If you purchase a bond between interest payment dates, you receive the full half-year's interest on the next payment date, even though you didn't own the bond for the full time.

So that you don't end up with interest income you didn't earn, you pay an additional amount when you buy the bond.

When you buy the bond between interest dates, you pay the price of the bond plus you pay the amount of interest that has built up before you owned it. This amount is called "accrued interest." This way, when you receive the interest payment, it is offset by the amount you paid in the beginning, and you will be left with only the interest the bond earned while you owned it.

For example, let's say you bought a bond on March 1 that pays $300 in interest every six months. The next payment you expect to receive is due July 1. So you owned the bond for two thirds of the time that the interest payment will cover.

Now you need to handle the accrued interest on your tax return. Your Form 1099-INT will show the full amount of interest you received. It doesn't show the part that you paid back when you bought the bond. This part, the accrued interest, becomes your "accrued interest adjustment." You should be able to find the amount on your purchase statement. It's probably marked "interest."

Enter that amount as an adjustment and we'll handle the rest.

If you're not sure where to find this amount on your statement, contact your broker for assistance.

- You would make an adjustment to decrease the amount of interest you're paying tax on this year if:

- You reported your savings bond interest as you earn it, instead of reporting it all at once when you redeem the bond, AND

- You redeemed your savings bonds this year.

Enter the amount of income you included on your past years' returns as the adjustment.

U.S. savings bonds for which you can postpone reporting the interest earned until you cash or dispose of the bonds or in the year they mature.

Series EE bonds have a maturity of 30 years and were first offered in July 1980. They are issued at a discount. You receive the face value at maturity.

Series I bonds were first issued in 1998. They earn inflation indexed interest payable when the bonds mature.

You must report both your taxable and your tax-exempt interest income.

Some examples of taxable interest income are:

- Interest on your savings accounts and certificates of deposit

- Interest income you receive on bonds you own, whether from the United States government or from a corporation

- Interest someone else pays you if you've loaned money to someone

- Interest you receive if you sold property or other assets to someone on installment sale

Some examples of tax-exempt interest income are:

- Interest you receive on bonds issued by state and local governments

- Interest you receive on your mutual fund investments if you invest in tax-exempt municipal funds

You'll receive a Form 1099-INT (or your broker or bank's substitute statement) for most taxable interest income you receive.

You probably won't receive a Form 1099-INT if you're receiving interest income from an individual.

Your broker or payer of tax-exempt interest will probably send you a statement telling you the amount of tax-exempt interest income you received. You shouldn't receive a Form 1099-INT showing tax-exempt interest income.

There are also special rules for original issue discount income.

You have a seller-financed mortgage if you sell a home to someone, the buyer uses the home as a residence, and as part of your payment from the buyer, you accept a trust deed or other repayment promises (such as a promissory note).

The interest the buyer pays you on the trust deed or loan is seller-financed mortgage interest income.

You are the seller if you financed at least part of the buyer's purchase price when you sold the home.

You are issued a Form 1099-OID when you have purchased a bond or note for an amount that is less than face value. An OID (Original Issue Discount) is the excess of a bond or note's stated redemption price over its issue price. The "stated redemption price" is usually the face value of the bond or note (say $10,000). The "issue price" is generally the amount at which the bond or note was first sold by the issuer (say $9,500).

The profit you make on the purchase ($500 in our example) is the OID and is taxable interest income for you over the life of the bond. You must include a part of the OID as interest income each year you hold the bond - even if you don't actually receive any interest until the bond matures. You will be issued a Form 1099-OID to document your OID interest.

You must spend the money at an educational institution that qualifies. Most universities and colleges and some vocational schools qualify. Your school qualifies if it's eligible for federal assistance.

If your school qualifies, you can count the amounts you spent on:

- tuition

- books and materials required for the classes

- other fees

- contributions to a Coverdell ESA or a QTP

You can't count:

- room and board

- classes for hobbies or sports unless these classes were a part of a degree program

- expenses that were used to figure an education credit

- expenses used to figure the nontaxable amount of a distribution from a Coverdell ESA or QTP

- expenses covered by nontaxable educational benefits

It's the type of interest you earn on some bonds and other financial instruments you purchased at a discount. To qualify as original issue discount, you usually have to be the first purchaser of the bond.

As one example, you might buy a $10,000 bond but pay only $9,500 for it. You don't receive interest payments on the bond, but when the bond matures, you can cash it in for the full $10,000. The $500 difference is the interest you will earn. It's called original issue discount.

Some bonds that carry original issue discount pay interest periodically; others do not.

The issuer of the bond (or your broker, if you bought it from a broker) will file Form 1099-OID with the IRS, and send a copy to you. The form shows the amount of the discount you have to report as income.

The original issue discount rules apply to financial obligations other than bonds. If you receive a Form 1099-OID and are unsure why you have it, contact the issuer of your 1099 and ask for an explanation. Publication 550, Investment Income and Expenses, gives more details about the kinds of financial obligations that create an original issue discount situation.

This phrase has a tax meaning to you only if you receive tax-exempt interest income. A private activity bond is a bond issued by a state or local government to pay for certain projects. At least some part of the project will benefit private individuals. Tax-exempt mortgage bonds and redevelopment agency bonds are examples of private activity bonds.

You don't pay regular income tax on private activity bond interest. But if you pay alternative minimum tax, you have to include your private activity bond interest in your alternative minimum taxable income. We take care of that for you.

You must report both your taxable and your tax-exempt interest income.

Some examples of taxable interest income are:

- Interest on your savings accounts and certificates of deposit

- Interest income you receive on bonds you own, whether from the United States government or from a corporation

- Interest someone else pays you if you've loaned money to someone

- Interest you receive if you sold property or other assets to someone on installment

Some examples of tax-exempt interest income are:

- Interest you receive on bonds issued by state and local governments

- Interest you receive on your mutual fund investments if you invest in tax-exempt municipal funds

You'll receive a Form 1099-INT (or your broker or bank's substitute statement) for most taxable interest income you receive.

You probably won't receive a Form 1099-INT if you're receiving interest income from an individual.

Your broker or payer of tax-exempt interest will probably send you a statement telling you the amount of tax-exempt interest income you received. You should receive a Form 1099-INT showing tax-exempt interest, including exempt-interest dividends, in box 8 and box 9.

There are also special rules for original issue discount income.

For your convenience, TurboTax allows you the option to enter interest income either where you enter your other interest income or where you enter information about your installment sale. Just be sure you do not enter the interest in both places.

Similarly, if the interest was seller-financed interest, you can enter the interest either where you enter all other seller-financed interest, or where you enter information for your installment sale.

To enter your information as an installment sale, follow these steps:

If you're using TurboTax software (CD): - Select Search Topics or Forms.

If you're using TurboTax software (CD): - Type in Installment sales.

If you're using TurboTax software (CD): - Check the option for Sales of real estate, cars, or anything else for which you receive payments over two or more tax years (installment sales).

If you're using TurboTax Online: To enter your information as an installment sale, select the Tools menu at the top right of your screen, and then select Topics & Form. After the Search Topics and Forms window opens, enterInstallment Salesin the search field. Find and highlight the item Sales of real estate, cars, or anything else for which you receive payments over two or more tax years (installment sales) and then select Go. This will take you to a screen that will allow you to choose your own options.

This is called "backup" withholding and it usually happens when your bank or broker doesn't have your correct social security number.

Most of the time, the solution is simple. Call your bank or broker and ask for the form they use to record your social security number for their records. When you receive the form, fill it out and send it back. In the future, your bank or broker shouldn't withhold income taxes from your interest earnings.