Schedule 1: box-by-box
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You filed the 1040A because your tax life is pretty simple. But nothing is ever entirely simple when it comes to taxes.

Sometimes, even with a 1040A, you have to give the Internal Revenue Service a bit more information. That means another tax form. If you're a diligent saver, that extra paperwork is likely to be Schedule 1.

Fewer 1040A filers, however, are needing this form. Previously, you had to fill it out when you had interest income of more than $400; the same was true for $400 or more in dividend income from your stocks or mutual funds. Now you don't have to send Schedule 1 with your taxes if your interest and dividend earnings are $1,500 or less. You can just put the amounts directly on your individual return.

This new earnings limit is applied separately to interest and dividend income. So if you received only $500 in interest and your stocks paid $1,200 in dividends, you don't have to file Schedule 1 even though your investment income total comes to $1,700. But if either category alone exceeds the $1,500 threshold, you must report the amount on the form's appropriate line and send it to the IRS.

While Schedule 1 is most commonly used to report interest and dividend income, it's also required if you want to exclude interest from some older savings bonds, received interest or dividends as a nominee (that is, the account was registered in your name but the actual money belonged to someone else) or you got interest from a seller-financed mortgage and the buyer used the property as a personal residence. If any of these situations apply to you, the information you need to report should be detailed on the tax statements you received.

As always, you begin filling out your Schedule 1 by entering your name and Social Security number at the top.

Now come the details on your investment earnings.

Part 1, Interest
Most or all of your interest income earned will be detailed on 1099-INT forms. You and the IRS each get copies from your bank or other financial institution, so it's important that you report all your interest income. If you don't, you can bet that a tax examiner will come to you with questions about the oversight.

List each payer and the amounts received on line 1, which is actually several lines to give you plenty of room to list all the interest you earned. If you sold your home or other property, provided seller financing and the buyer used the property as a personal residence, your first entry on line 1 should be the interest amount earned from that transaction. Don't forget to include the buyer's name, address and Social Security number.

Following that entry, list all your other interest-bearing accounts in the line 1 section along with amounts you received. If you need more space, attach a separate page with the details.

Line 1 is also where you would report any nominee interest you got. You're a nominee on an account if it's in your name, but the interest actually belongs to someone else. Don't worry. You'll be able to eliminate this nominee interest from your tax calculations in a moment.

So if you pass that money along to its rightful -- and taxable -- owner, why do you have to report it on Schedule 1? Because the interest earning account is in your name and tax ID. The IRS already has a copy of the nominee money you got, and if you don't account for it when you file your tax return, a tax examiner will come asking about it. That's why when you distribute this interest, you must give the actual owner a Form 1099-INT and let the IRS know you transferred the money by filing a Form 1096.

After you've entered all your interest (including nominee amounts) subtotal it, still within the line 1 area. Below this subtotal, write "Nominee Distribution" and show the total interest you received as a nominee. Then subtract this nominee amount from the subtotal.

If you received any tax-exempt interest (again, it should be noted on the 1099 statement you received), follow the same process you just did for nominee interest. In this case, identify the amount to be subtracted as "Tax-Exempt Interest." And don't forget to include this tax-exempt interest in your Form 1040A, line 8b.

OK, you've got all your various interest amounts entered, with the nominee and tax-exempt portions not taxable to you subtotaled and subtracted. Now enter the final interest income that you are responsible for on line 2.

Savings bond interest
Some interest is not taxable, but the IRS still wants to know about it on line 3.

This is the case for series EE or I savings bonds that were issued after 1989. If you used these bond proceeds to pay qualified higher education expenses for yourself, your spouse or your dependents, then you may be able to exclude part or all of the interest those bonds earned. You'll need to fill out Form 8815, and then transfer the amount of bond interest you don't have to pay taxes on to line 3 here. (Don't forget to attach Form 8815 to your 1040A when you file.)

Then subtract line 3 from line 2. This amount, your taxable interest income, goes on line 4 of Schedule 1 and also on line 8a of your 1040A.

If interest is the extent of your unearned income, you're through with Schedule 1. But if you also received dividend income, move on to Part II.

Part II, Ordinary Dividends
As with interest income, you must file Schedule 1 if you received more than $1,500 in ordinary dividends. Dividend earnings are from your mutual fund accounts or individual stock holdings and are reported to you on 1099-DIV statements. These amounts (which also are copied to the IRS so be thorough) go on Part II of the schedule.

On line 5 (multiple lines as in the line 1 interest counterpart), enter your dividend sources and amounts. Again, if you need more space, attach a separate sheet with the pertinent information. And the rules for reporting dividends you received as a nominee are the same as for nominee interest payments.

Once you've entered all your dividend income and subtracted out any nominee dividends, enter the result on line 6. Also put the line 6 amount on line 9a of your Form 1040A.

And that's it! You're through with Schedule 1.

Michele Erbrick assisted with this report.

-- Updated: Feb. 9, 2004