TAX TIP No. 58
Reporting your investment earnings
Of course, to
see if you need to file either
Schedule B or Schedule 1,
you'll have to total up the
amounts from all your 1099-INT
and 1099-DIV forms. Because
the tax schedules are designed
for this information, why
not go ahead and use the one
that matches your return?
If the totals aren't enough to require filing the appropriate investment earnings schedule, simply keep
it as part of your
personal tax records.
And taxpayers with bank or financial accounts
in foreign countries, or who are involved in certain
foreign trusts, will still have to file Schedule B regardless
of interest or dividend income amounts.
Distributions also divided on the forms
What if your year-end account statement indicates you
received capital gain distributions? You still might
be able to escape the complicated Schedule D, Capital
Gains and Losses, and report these earnings directly
on your individual return (1040 or 1040A filers only).
Capital gain distributions do not mean
that you personally sold any of your holdings. Rather,
asset managers sell portions of portfolios throughout
the year. If these sales produce a profit, the gain
is passed along to individual shareholders as capital gain distributions.
To let the IRS know of this income, 1040
and 1040A filers with no other capital-gain activity
can simply enter the distributions amount on their individual
Form 1040 taxpayers report distributions
on line 13. Be sure to check the box at the end of 13a
so the IRS won't look for a Schedule D with your return.
If you file Form 1040A, your distributions go on line
Figuring your investment tax bill
Now to the ultimate goal of tax filing: determining
your tax bill. When it comes to your investment earnings,
you'll find that your earlier ease in reporting earnings
is countermanded by a separate page of tax computations.
You probably noticed that the dividend
and distribution amounts entered on line 9b are inset
on each return so they're not included when you total
your adjusted gross income. Rather, you must transfer
these amounts, along with other entries from your return,
to a work sheet found in both the 1040 or 1040A instruction
booklets. You'll also need the work sheet if you reported
qualified capital gains distributions (line 13 on the
1040; line 10 on 1040A forms).
By variously adding and subtracting different
entries transferred from your return to the work sheet,
you'll eventually arrive at your correct tax bill. It
definitely takes time, especially if you're still doing
your taxes by hand, but you have two good reasons not
to take any shortcuts here.
First, the IRS gets copies of all your
earning statements so agents can double check your amounts.
If your numbers don't jibe with the statements, the
IRS will certainly let you know.
But more importantly, doing the extra
math can save you some tax dollars.
Updated: March 27, 2009