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Schedule B: box-by-box

If your investments really paid off last year, the Internal Revenue Service wants to know. And depending on just how much you earned from your savings accounts, stocks and bonds, certificates of deposit or mutual funds, you might have to report that income on Schedule B. (If you received a form printed by the IRS, you'll find Schedule B on the back of Schedule A.)

Thanks to an increase in the reporting requirements, fewer filers have to fill out Schedule B . 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 B with your taxes if your interest and dividend earnings are $1,500 or less. You can just put the amounts directly on your 1040.

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 B 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.

Of course, to see if you need to file Schedule B, you'll have to tote up the amounts from all your 1099-INT and 1099-DIV forms. Since Schedule B is designed for this information, why not go ahead and use it? But don't file it with your 1040; simply keep it as part of your personal tax records.

And the IRS still requires you file Schedule B if any of the following apply to you:

  • You sold your home or other property, provided seller financing and the buyer used it as a personal residence.
  • You received interest or dividends as a nominee, that is, the earnings are in your name but they actually belong to someone else.
  • You received a Form 1099 for interest as a purchaser of a bond with accrued interest.
  • You received a Form 1099-INT for tax-exempt interest.
  • You had a foreign account or received a distribution from a foreign account.

Now that you've determined that you must complete Schedule B, let's get to it. It begins the same way as most IRS forms. First, enter your name and Social Security number.

Now we go to the meat of the form: reporting your unearned income.

Part I, Interest
Most or all of your interest income earned will be reported on 1099-INT forms. You and the IRS each get copies from your bank or other financial institutions, so it's important that you report all your interest income in Part I. 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 actually is several lines to give you plenty of room to list all your interest-paying accounts. 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 interest 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.

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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.

But if you pass that money along to its rightful -- and taxable -- owner, why do you have to report it on Schedule B? 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, you'll hear from the IRS. That's why when you do 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 amount from the subtotal.

If you received any tax-exempt interest (again, it should be noted on the 1099 statement you received), follow the rules 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 on your Form 1040, line 8b.

OK, you've got all your various interest amounts entered, with the 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 1040 when you file.)

Then subtract line 3 from line 2. This amount, your taxable interest income, goes on Schedule B's line 4 and also on line 8a of your 1040. If interest is the extent of your unearned income, you're through with Schedule B.

But if you also got dividend income, move on to Part II.

Part II, Ordinary Dividends
As with interest income, you must file Schedule B 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 like the form's interest counterpart), enter your dividend sources and amounts. Again, if you need more space, attach a separate sheet with the pertinent information.

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 1040.

Part III, Foreign Investment Income
Because of concerns about potentially abusive tax shelters in other countries, the IRS wants to know about your foreign investing. That's the reason for Part III, foreign accounts and trusts. And since tax shelters tend to be used primarily by people with lots of investment income, the IRS wants you to complete this section if you reported more than $1,500 in either Part I or II.

Line 7a is straightforward. Basically, if you had a foreign account, check "Yes" here. Even if you did have such an account, the IRS says you can check "No" if the average balance in the account was less than $10,000 during the whole year.

If you do answer "Yes" to 7a, then you'll also have to file Form TD F 90-22.1, Report of Foreign Bank and Financial Accounts, by June 30. And you must put the name of the foreign country where the account is located on line 7b.

Line 8 wants to know if you were financially involved in a foreign trust account. In this case, loans from such a trust count as a distribution so you must check "Yes" here. If so, you also have to complete Form 3520 or Form 926.

If you have a lot of foreign accounts, you probably also have a tax adviser and accountant to take care of your affairs. These professionals will explain any additional forms you need for Part III, as well as what they entered in Parts I and II, when you go to sign your tax return.

The great majority of us who file Schedule B, however, don't have to worry about Part III complexities. We simply have to report our interest or dividend income on this one-page form.

Michele Erbrick assisted with this report.

-- Updated: Feb. 9, 2004

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See Also
1040 box-by-box
1040A box-by-box
1040EZ box-by-box
Schedule 1 box-by-box
Schedule A box-by-box
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