 Income tax 2022-2023. Interest income. Let's do some wealth preservation with some tax preparation. Support accounting instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course each course then organized in a logical reasonable fashion making it much more easy to find what you need then can be done on a youtube page we also include added resources such as excel practice problems pdf files and more like quickbooks backup files when applicable so once again click the link below for a free month membership to our website and all the content on it when looking at the income tax formula we're focused online one that being income remembering that the first half of the income tax formula is in essence an income statement which makes sense with an income tax although a strange income statement where we have income up top and then the expenses are basically in the form of deduction to get down to not net income but taxable income we're focused up top on the income line which is deceptively small here but note that we can expand that income line to think about the vast amount of things that might be included as income and the types of things that might be able to be exempt from income the general rule from the irs is that everything is basically income unless the irs code says that it is specifically exempt here we're going to be talking about interest income which is usually going to have to be included in income and possibly have a sub schedule in some cases the schedule will be so if it's included in income that's usually bad from a tax perspective because it'll increase the taxable income and therefore the tax will be applied to it however there might be some kinds of interest income that are exempt so in that case the tax code specifically saying yes you had income but it's exempt for taxes and therefore you might have to report it on the tax return but not include it as taxable income meaning it's not going to have an increase in the taxable income rate to be applied to it okay now when we're thinking about the reporting forms for the interest income the form will generally be a 1099 int the 1099 interest it might not look like this because they might kind of truncate it a little bit when it comes from your financial institution oftentimes a bank or other kind of financial institution and usually we have this box one which would be the normal kind of interest income which we would have to apply but you could also have box two early withholding uh withdrawal penalty box three interest on us saving bond and treasury obligations box four federal income tax with held often not the case withholdings that is when you have interest income although if you have a lot of interest income you can set your withholdings in its investment expenses foreign tax paid so if there's a foreign situation with it then you have mixing upping or problems with the tax code between us and foreign countries so we have to have agreements possibly with foreign countries so that we don't have like a double taxation type of situation for the same income foreign country or us possession tax exempt interest so now we're talking about that type of interest that might be exempt for taxes and then specified private activity bond market discount bond premium bond premium on treasury obligations bond premium on tax exempt bond and then tax exempt and tax credit bond the c us i p so some of these boxes are less common than others if you see something in here in a box that you're not familiar with then you can of course look at the instructions and and you get some more information about what is included in that particular box and that can also lead you on the journey of pursuing more questions about it if there's some more of an unusual type of situation now remember the general rule why would the bank or financial institution issue the 1099 interest because the government is basically going to be regulating the the financial institution so obviously you're going to get the 1099 interest the government's wanting them to give it also to the government to the irs therefore if you don't report something that's on the 1099 interest you will almost surely get some kind of notice from the iris saying we got a 1099 that you didn't get and have some kind of adjustment related to it okay so the most of the information next is going to be coming from the 2022 instructions for schedule b the schedule b is a schedule that you might have to use if your interest goes above a certain threshold so that's the interest and ordinary dividends and this is the line item on the first page of the form 1040 where we have line 2 a where we have the tax exempt interest here and then we have b the taxable interest and then if your interest is above a certain threshold you might have to have the schedule b as well we're focused on the schedule b with the interest portion which is part one as opposed to what we'll look at later the second part the dividend part okay so you were going to use schedule b form 1040 if any of the following applies so this means that if you have interest you're typically going to have to take that 1099 and report it as income if you have interest income if your interest income goes above a certain threshold then you're going to have to report it not only on the first page of the 1040 but you'll also have the schedule b you can test this out and we will test this out using tax software as we start to populate interest income if it goes over a certain threshold then you've got this second schedule so we would use schedule b you had over 1500 taxable interest or ordinary dividends you received interest from a seller finance mortgage and the buyer used the property as a personal residence you have accrued interest from a bond you are reporting original issue discount that's an OID of less than the amount shown on form 1099 OID possibly more of an unusual situation for most investors you are reporting interest income of less than the amount shown on a form 1099 due to amortized bond premium so we've got some special kind of circumstances with regards to the functioning of different types of bond type of investments and you are claiming the exclusion of interest from series ee or i us saving bonds issued after 1989 you received interest or ordinary diff dividends as a nominee you had a financial interest in or a signature your authority over a financial account in a foreign country or you received a distribution from or were a grantor of a transfer or to a foreign trust so part one interest line one report on line one all of your taxable interest so obviously this would typically be from the 1099 interest taxable interest generally should be shown on your form's 1099 int form 1099 OID or substitute statements include interest from ee h h h and i us savings bonds also include any accrued market discount that is includeable in income and any gain on the contingent payment debt instrument that is includeable in income as interest income so it gets a little bit kind of messy on the certain kind of a bond calculations so usually it's a fairly straightforward situation but you can imagine a weird kind of situations in the accruing and the interest of the bond due to the way the purchasing and the interest calculations of the bonds work if you buy them at a premium or a discount for example and so on so don't report online one any tax exempt interest so we're not including the tax exempt portion there because this is going to be the taxable line item so the tax exempt interest later for more information so for more information on stated interest original issue discount that's the OID market discount contingent payment debt instrument and premium you can see publication 550 and publication 12 12 seller financed mortgages so this again somewhat of an unusual situation usually when you're looking at the schedule b or reporting interest it's fairly straightforward kind of situation but you have some of the these kind of more unusual situations that could come up as well if you sold your home or other property and the buyer use the property as a personal residence list first any interest the buyer paid you on a mortgage or other form or seller financing be sure to show the buyer's name address and social security number you must also let the buyer know your social security number so if you don't show the buyer's name address and social security number or let the buyer know your social security number you may have to pay a $50 penalty if you or the buyer do not have a social security number use the appropriate tin for the filer or recipient of form 1098 so that's the interest you know form for mortgage interest so for more information see general instructions for certain information returns 2022 nominees again somewhat of a usual unusual situation here if you received a form 1099 int that includes interest you received as a nominee that is in your name but the interest actually belongs to someone else report the total online one do this even if you later distribute some or all of this income to others under your last entry online one put a subtotal of all interest listed online one below the subtotal enter nominee distribution and show the total interest you received as a nominee subtract this amount from the subtotal and enter the result online too so basically you're giving them more information in that case so you're telling them you know this is the amount on because you could see what's happening here right if you the iris is going to have the form 1099 and you're basically saying I've got this 1099 issued to me but I think it should be going to somebody else in essence and so you're basically listing out in the schedule that you have the interest to you minus the stuff that's going to someone else so it still ties into the actual form 1099 and then tells the iris where they need to go to get their money which is someone else so but if you received interest as a nominee you must give the actual owner a form 1099 int unless the owner is your spouse and file forms 1096 and 1099 interest with the irs for more details see the general instructions for for certain information returns and the instructions for form 1099 int and 1099 oid a crude interest so a crude interest is kind of the interest has has increased but possibly you haven't received the interest at that point in time so when you buy bonds between interest payment dates and pay a crude interest to the seller this interest this interest is taxable to the seller so if you received a form 1099 for interest as a purchaser of a bond with a crude interest follow the rules earlier under nominees to see how to report the accrued interest but identify the amount to be subtracted as accrued interest so you might end up with a similar kind of situation where the 1099 possibly has to be adjusted obviously you have to tie in the 1099 what's on it to what's on your forms or you can have a problem so if you need to have something different than that you would want to show the detail of of the change and the adjustment to it so that so that you could say hey this is what's on the 1099 this is why there's a change to it this is what i'm reporting after that change is taking place original issue discount the oid if you are reporting oid in an amount less than the amount shown in box one or box eight a form 1099 oid follow the rules earlier under nominees to see how to report the oid but identify the amount to be subtracted as oid adjustment similar kind of scenario here you got something possibly different than what's on the 1099 we've got to tie into what's on the 1099 we need to show the work show the detail so that we don't get confused the irs in a confused irs with our particular tax return causes us problems however if the payer reported to you a net amount of oid on the bond reflecting the offset of the gross amount of oid by any acquisition acquisition is confirmed a premium no reduction of the amount of oid income reported to you by the buyer may be needed on schedule b for the bond amortizable bond premium so now you've got you know when you buy the bond if you're buying if you're investing in bonds then it's likely that if you're if you're a passive kind of investor a long-term investor you might be in investing in like mutual funds that have bonds within them which is a little bit different than investing like in individual bonds themselves but a bond when you think about a bond in general you're basically giving money like a note alone in essence to a corporation or government entity and the rate on the bond is fixed so you might pay actually more than or less more or less than the face amount of the bond if you pay more than the face amount of the bond then you bought the bond at a premium and you've got to allocate basically the premium or the difference between the premium and the face amount is basically considered interest and then you could deal with this kind of premium problem right you've got this kind of premium problem that could have taxable implications with it so amortizable bond premium so if you elect to reduce your interest income on a taxable bond by the amount of taxable amortizable bond premium follow the rules earlier under the nominees to see how to report of the interest so if that is again the case then you might end up with a situation with your 1099 isn't reporting the proper amount of interest after you take into consideration the amortizable bond premium and you're going to have to show your work again to not confuse the IRS but identify the amount to be subtracted as ABP adjusted so however if the payer reported to you a net amount of the interest income on the bond reflecting the offset of the gross amount of interest income by the amortizable bond premium no reduction of the amount of interest income reported to you by the payer is needed on schedule B for the bond okay so now we have the tax exempt interest so this would be that scenario where it would have been income but now the iris is explicitly saying it's exempt for whatever reason that they they don't they're going to give some benefit to certain issuers or of debt right some beneficial which possibly are going to be the states so the governments government so if you if you give money to the loan money to the government then you might get a benefit you can see why they might want to do that as a government entity so if you received any tax exempt interest including any tax exempt oh id such as from municipal bonds so those are going to be government bonds in essence each payer should send you a form 1099 int or form 1099 oh id in general your tax exempt status interest should be shown in box eight of form 1099 int so we saw the 1099 it'll be indicated not you would think in box one but rather in box eight to say hey you got to report this because you did get income but it's tax exempt so it shouldn't have a federal income tax component for it or or or a calculation to it so for tax exempt oh id in box two a form 1099 oh id and your tax exempt oh id should be shown in box 11 of form 1099 oh id so enter the total online to a of your form 1040 1040 s r so that's to be the tax exempt place i would assume so however if you acquire a tax exempt bond at a premium only report the net amount of tax exempt interest online to a or your form 1040 or 1040 s or that is excess of the tax exempt interest received during the year over the amortized bond premium for the year so also if you acquire tax exempt oh id bond at an acquisition premium only report the net amount of the tax exempt oh id online to a of form 1040 or 1040 s or that is excess of the tax exempt oh id for the year over the amortized acquisition premium for the year if you have more questions about that situation you could see publication 550 for more information oh id bond premium and acquisition premium also include online to a of your form 1040 or 1040 s r any exempt interest dividends from a mutual fund or other regulated investment company this amount should be shown in box 12 of form 1099 div so we'll talk about dividends later if an amount is shown in box nine of form 1099 int you must generally report it on line 2g of form uh 6251 c instructions for form 6251 if you're in that situation line three if during 2022 you cashed series ee or i us savings bonds issued after 1989 and you paid qualified higher education expenses for yourself your spouse or your dependents you may be able to exclude part or all of the interest on those bonds so if you've got those bonds in place the ee bonds education then you can take a look at form 8 8 1 5 for more details there