TAX TIP No. 58
Reporting your investment earnings
it making your money work
for you. The Internal Revenue
Service calls it unearned
income. Regardless of the
name, the tax collector wants
to know how much you make
each year on earnings from
your savings accounts, stocks, bonds, certificates of
deposit or mutual funds.
|In this tax tip:
|Smaller earnings mean less
|Two types of dividends, two lines to complete
|Count interest and dividends separately
|Distributions also divided on the forms
|Figuring your investment
Just how you report your investment income,
however, depends largely on how much you made. For many
taxpayers, the process is relatively simple and requires
no additional tax forms. Those who pocketed a bit more
from their investments will have to give the IRS details
via extra forms.
And every investor who benefits from the
gains and dividend tax rates will have to pay for
their tax savings by running extra computations to figure
out their precise IRS bill.
Smaller earnings mean less tax filing
First, take a look at investors
who have the easiest reporting
If your dividend and interest income is
less than $1,500 in each category, you don't have to
file Schedule B with your 1040 (or Schedule 1 if you
file Form 1040A). You simply list your interest and
dividend income directly on your 1040 or 1040A.
And don't forget to report tax-exempt interest. It won't be counted in your eventual tax calculations, but the IRS wants to know about it anyway on line 8b of both the 1040 and 1040A.
The $1,500 threshold also applies to interest
income earned by Form 1040EZ filers. Previously, when
the interest earnings limit was substantially smaller,
taxpayers who otherwise qualified to use the simple
EZ return were forced to file one of the more complex
But now, as long as an individual meets
the 1040EZ's other requirements (e.g., taxable income,
filing status), that taxpayer can earn up to $1,500
in interest and still use this one-page return.
The EZ remains off limits, however, for
individuals who earn dividend income. They'll have to
move up to the 1040A.
2 types of dividends, 2 lines to complete
Taxpayers who are able to report dividend payments
directly on their 1040 or 1040A returns also need to
note that there are two lines for these earnings.
On each of these
forms, ordinary dividends
go on line 9a. Just below
is 9b, where you'll enter
any qualified dividends that
are eligible for the lower
tax rates. For most taxpayers,
these qualified amounts are
taxed at 15 percent, rather
income tax rates that
go as high as 35 percent.
In some cases, however, the
tax rate on investment income
could be zero.
(More on figuring
out what tax you owe on your
various earnings later.)
tax statement for each dividend-paying investment
will detail how much of your earnings to enter on line
9a and 9b.
Count interest and dividends separately
Taxpayers also must evaluate their earnings
in both interest and dividend categories separately
to see if they can be free of some forms. The new limit
is applied independently to each type of income.
So, if you received $500 in interest from
a certificate of deposit and your stocks paid $1,200
in dividends, you don't have to file Schedule B or Schedule
1 even though your investment income total is $1,700.
But if either category alone exceeds $1,500, you must
report the amount on the appropriate schedule and send
it with your return to the IRS.
Updated: March 27, 2009