Reporting your investment earnings
Of course, to see if you need to file Schedule B, you'll have to total up the amounts from your Form 1099-INT and Form 1099 DIV. Since you have to add up your investment earnings to see if you need to report them on Schedule B, why not use Schedule B to do just that? 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 more complicated Schedule D, and Form 8949 to 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, Form 1040 and Form 1040A filers with no other capital gain activity can simply enter the distribution amounts on their individual tax returns.
Form 1040 taxpayers report distributions on line 13. Be sure to check the box at the end of the line so the IRS won't look for a Schedule D with your return. If you file Form 1040A, your distributions go on line 10.
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 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.
New net investment income tax
If, however, you are a higher-income earner, you'll end up paying a bit more for your portfolio prowess.
The 3.8 percent net investment income tax, or NIIT, took effect Jan. 1, 2013. This provision, which is part of the Affordable Care Act, applies to taxpayers who make more than a certain amount. The NIIT earnings thresholds are $125,000 for married taxpayers filing separate returns; $200,000 for single or head of household filers; and $250,000 for married couples filing jointly or a widow or widower with a dependent child. You also face more figuring and filing in connection with the 3.8 percent net investment income tax.
In these cases, you'll have to pay the surtax on either your annual net investment income or the amount that your modified adjusted gross income exceeds your income threshold. The tax applies to the lesser of those two amounts.
This NIIT is computed on Form 8960 and reported on line 60 of Form 1040.