 Income tax 2023-2024. Interest income. Get ready and some coffee because we need to save some money for vacation with the help of income tax preparation 2023-2024. First, a word from our sponsor. Yeah, actually we're sponsoring ourselves on this one because apparently the merchandisers they don't want to be seen with us. But that's okay whatever because our merchandise is better than their stupid stuff anyways. Like our trust me, I'm an accountant product line. Yeah, it's paramount that you let people know that you're an accountant because apparently we're among the only ones equipped with the number crunching skills to answer society's current deep complex and nuanced questions. If you would like a commercial free experience consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com. Most of this information can be found in the line instructions section of the form 1040 instructions tax year 2023 which you can find on the IRS website at irs.gov, irs.gov. Looking at the income tax formula we're still online one income remembering the first half of the income tax formula is in essence a funny income statement. A normal income statement having income minus expenses resulting in net income. The tax income statement having income minus different types of deductions resulting in taxable income as opposed to the net income. We're focused in on the income line remembering that for taxes income is basically bad. So we would like to have things that are exempt from income so the question is often do we have to include something in income or not. And if we do have to include it in income could we possibly tax it at more favorable tax rates as opposed to ordinary income types of tax rates. So those are the two main questions we often ask when we have these scenarios with relation to income line items such as interest income. This is the first page of the form 1040 you can see here in the income section we have the tax exempt interest and the taxable interest that will be focused in on. This is a schedule B if your interest income is as above a certain threshold you might have to file then the schedule B providing more information about this type of income for interest and dividends. This is the 1099 int which is typically the form that will help us to drive the type of interest income that we have to report. So interest income therefore is usually fairly straightforward because the financial institutions have to provide this information because they're being pressured by the government. Right so the financial institutions usually big banks and other types of financial institutions they in order to keep their leverage the IRS is basically saying hey do you want to stay in business. Well if so then you have to give this information to both the person who's receiving the income and to us. So both we and the and the IRS have in essence this 1099 information if we do not report what's on the 1099 on our tax return. We will almost certainly get an audit type of situation because the machine the computer can kind of pick that up right. So the most relevant lines are typically going to be the interest income up top. We've got early withdrawal penalty. That's not typically going to be the case. But if there was an early withdrawal situation then you could have that if there was like a retirement plan or something interest on US savings bonds. So you might have interest subject to that might have tax benefits related to it. That's one thing that the government can do to try to encourage people to be buying government debts right. They can basically give a tax advantage and that will incentivize investing or loaning in essence money to the government and as opposed to other business. You could have withholdings although that's probably not as common on the 1099 interest as like 1099 hours for distributions from a retirement plan or a W to form. For example investment expense foreign tax paid if there's foreign tax applied foreign country or US territory tax exempt interest. So if there's exempt interest again line eight special private activity bond interest market discount bond premium bond premium on Treasury obligations and so on. Now note if you have more of an unusual kind of situation meaning you have some boxes checked that aren't the norm. Then you can look at the instructions and if you don't get the instructions from a client or from the forms that you've received. You can go to the iris website and look up the form and then scroll down and find the instructions which could give you more detail about. For example each of the boxes which will help you to then drill down further on any kind of research you might need to do from there. Okay so line two a tax exempt interest. If you receive any tax exempt interest including any tax exempt original issue discount OID such as from municipal bonds each payer should send you a form 1099 int or a form 1099 OID. So again with the interest usually it's fairly straightforward because you'll get the documentation in the form of a 1099 from the financial institution. In general your tax exempt stated interest should be shown in box 8 of form 1099 int or for a tax exempt OID bond in box 2 of form 1099 OID and your tax exempt OID should be shown in box 11 of form 1099 OID enter the total online to A. Typically data input software will usually have these boxes lined up quite nicely in the data input and can help you to populate your returns. However if you acquired a tax exempt bond at a premium only report the net amount of tax exempt interest online to A that is the excess of the tax exempt interest received during the year over the amortized bond premium for the year. I'm not going to go into that in detail if you need to do more research on that you can look into it. One of the reasons I don't want to dig into that in too much detail is because most normal investors are often investing in stocks and bonds. Possibly with the help of mutual funds or ETFs possibly under even an umbrella of a 401k plan or an IRA or a 403B or something like that. Which means you do have exposure to the bonds but you're really invested in something that's kind of pooling all these things together with with other investors. And in that case you're probably going to have possibly interest from the bonds and dividends that could roll over and we'll talk about what would happen if they're under the umbrella of an IRA or something like that. But it might be less likely that you're going to have this issue with the bond premium. But if you do again you can go to the IRS website you could drill down on some further research from there also if you're quite a tax exempt OID bond on an acquisition premium. Only report the net amount of tax exempt OID online to A that is the excess of tax exempt OID for the year over the amortized acquisition premium for the year. So you can see publication 550 for more information about OID bond premium and acquisition premium if that is relevant to you. Also include online to A any exempt interest dividends from a mutual fund or other regulated investment company. This amount should be shown in box 12 of form 1099DIV. Now this can be a little bit confusing because you might think why isn't it on a 1099INT. That would be for interest. The DIV you would think would be for dividends. So in other words if you're investing money you're typically investing in stocks and bonds possibly investing in a mutual fund that has a mix of stocks and bonds within it. Now if you're investing in the bonds or you're investing in the bank putting it into a savings account or a CD for example. You're going to be generating revenue on that money that you have invested in the form of interest. That's our primary objective at this point to be thinking about the income from interest in which case you're basically loaning money to a financial institution. Usually who is paying you for holding on to your money which they're then going to use to invest elsewhere possibly for a higher return. That's the general idea. When you are investing in stocks then typically you're going to get paid in the form of dividends which is the distribution of the earnings of the company to the owners who are the shareholders. And the value of the stock could go up however you don't realize the value of the stock going up until you actually sell the stock. So it can be a little bit confusing when you're trying to line up all your forms and say these are all of my interest forms. These are all of my dividend forms because you could have a situation like this where you have the exempt interest dividends which will be on the form 1099 DIV. Which will basically be flowing through to the tax return for interest. So from a logistics standpoint from a data input standpoint that could be a little bit frustrating because a lot of financial institutions will put the dividends and the interest on the same form. Not for example and some won't and then you can have a dividend form for the interest. You also could have interest coming through flow through entities like a partnership that flows through to like a K1 or something like that. Which again gets a little bit confusing although the data input is easy because it's being reported on these forms. When you try to figure out where it is applying on the tax return then it can be a little bit confusing. So we just want to be aware of sorting our documentations but usually it's pretty straightforward because again you have the forms and the data input software. If you're using software which I highly recommend will help you to populate those forms properly. So don't include interest earn on your IRA health savings account Archer or Medicare Advantage MSA or Coverdale Education Savings Account. So this question is probably something that would come up. It's like if you just make the returns by the forms that you get you're going to notice hey I didn't get a 1099 interest or dividend forms for accounts that are under umbrellas for a retirement account such as an IRA for example could be the case. And if you just follow the forms then you'll do the data input typically correctly but you might have questions in terms of well why aren't I getting forms with relation to some of these other accounts where I possibly have investments in them. And you might have to explain that to a client and if you get to higher income tax preparation then you want to start doing tax planning in terms of what money should you be putting into an IRA and why and that kind of question. So remember that when you put money into like a retirement account such as an IRA 401k 403b other types of retirement accounts or tax benefit type of accounts. It's not like the government is coming up with a new type of investment when you do that you're not putting it into like a government you know new miracle investment. No you're investing in the same things you always would have typically you're investing in stocks and bonds you'd be buying stocks and bonds mutual funds just like you would if you didn't put it under a 401k plan or an IRA or anything like that. The only thing that those things are doing for you is giving you a tax benefit by basically giving you either a deduction or not forcing you to add the money in income at the year that you put it in and possibly not requiring you to pay taxes on the growth of those funds until you take it out. That's going to be the benefit you get to defer the taxes is the general idea. So therefore if you put your money under something that has an umbrella of a tax benefit then you might not have the same reporting requirements from the financial institutions to give you 1099 dividends and interest because possibly the 1099 dividends and interest are exempt not because the investments are different. It's still in stocks and bonds generally but because those investments are now under the umbrella of this tax exempt area where you're basically deferring your taxes. That's why you put them under that umbrella and subject your investments to to restrictions. You can't take them out as easily as the downside of course to plus sides you get a tax benefit. Okay. Line 2B taxable interest. So each payer should send you a form 1099 INT or form 1099 OID enter your total taxable interest income on line 2B but you must fill in and attach schedule B if the total is over $1,500 or any of the other conditions listed at the beginning of the schedule B instructions apply to you. So we have an interest line as we saw when we started the presentation on the first page of the form 1040. However if your interest goes above a certain amount which you might say hey that's pretty low $1,500 that doesn't seem that high but we're talking about interest income. So if you're getting interest that is $1,500 you must have a fairly significant amount of investments in financial institutions which is why they might want more scrutiny on it because we're just talking about the interest to earnings in the one year period. So then you would include the schedule B which gives more information about the financial institutions. So for more details about reporting taxable interest including market discount on bonds and adjustments for amortizable bond premium or acquisition premium you could see publication 550 that's on the IRS website iris.gov iris.gov interest credited in 2023 on deposits that you couldn't withdraw because of the bankruptcy or insolvency of the financial institution may not have to be included in your 2023 income. For more details you can see publication 550 that's a more of an unusual situation so if you run into that publication 550. So instructions for schedule B form 1116 this is foreign tax carryover reconciliation schedule so just to drill down on this a little bit deeper. So part one interest line one report online one all of your taxable interest taxable interest generally should be shown on your form 1099. I N T form 1099 O I D or substitute statements include interest from from the series E E H H H and I U S savings bonds also include any accrued market discount that is included in income and any gain on a contingent payment debt instrument that is included in income as interest income list each payers name and the amount don't report online one any tax exempt interest see tax exempt interest later for more information for more information on stated interest original issue discount that's the market discount contingent payment debt instruments and premiums you can see publication 550 and publication 1212 seller financed mortgages. So if you sold your home or other property and the buyer use the property as a personal residence list list first any interest the buyer paid you on a mortgage or other form or seller financing. So if this again somewhat of an unusual situation where you have a seller financed mortgage. Now again that's not normally kind of the case because usually what happens when you sell a home you are you have a mortgage on it you have a loan on it. And then the other person is going to pay you they're usually going to have to take out a loan but they're going to take out the loan from a financial instant institution. They're not taken out alone from you typically right. And so they take out a loan from the financial institution and then they pay you as you sell the home and then you pay off your financial institution for the mortgage that is outstanding take the the rest of the money and go with it. But you could imagine a structured sale where you have a seller financed mortgage situation. So if you sold your home or other property and the buyer use the property as a personal residence list list first any interest the buyer paid you on a mortgage or other form of the seller financing be sure to show the buyer's name address and social security number. So you must also let the buyer know your social security number 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 which seems fairly low $50 penalty but but 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 1098 typically reporting form for mortgage interest in that scenarios against somewhat of an unusual scenario. So for more information see general instructions for certain information returns 2023 nominees. So 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. So now you're going to say I got the interest and and it's under my social security number but it's not for me therefore possibly I shouldn't be the one that has to report it on my return and possibly pay taxes on it. However the IRS is going to see it as having been reported on your return because they have the 1099 too. So what do you do in that situation? So once again if you receive a form 1099 int that includes interest you received as a nominee that is in your name but for the interest actually belongs to someone else. Report the total online one do this even if you later distributed some or all of this income to others. Under your last entry online one put a subtotal of all interest listed online one below this 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 in other words you're going to list the amount why because if you don't the IRS is almost surely going to give you an audit or something because they have a 1099 listing the amount on their end right. So you have to list the amount and then subtract the amount out and in that way you'll be able to show what's on the 1099 so the IRS can see it and you'll be able to say this is why I shouldn't have to pay taxes on it so I'm going to reduce it back down and then assign it to whoever should be charged the interest right to pay taxes on it. So tip if you receive interest as a nominee you must give the actual owner of a 1099 int unless the owner is your spouse and file forms 1096 and 1099 int with the IRS. For more detail see the general instructions for certain information returns and the instructions for form 1099 int and 1099 oid against somewhat of unusual situations. All right accrued interest so when you buy bonds between interest payment dates and pay accrued interest to the seller this interest is taxable to the seller. So now you've got accrued interest interest that has compiled up between the payment dates. Again this is somewhat of an unusual situation because a lot of times most people buying and selling bonds are probably buying and selling bonds in the format of mutual funds or ETFs in which case you have possibly a little bit different structure than if you're buying individual bonds for example. So but if you receive a form 1099 for interest as a purchaser of a bond with accrued 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 again you might have to then report the amount on the 1099 and then reduce the accrued interest amount possibly which means you would follow the same kind of concept of reporting the amount on the 1099 and subtracting the amount given the IRS the rationale as to why. Original issue discount OID if you are reporting OID in an amount less than the amount shown in box one or box eight of form 1099 OIG follow the rules earlier under nominees to see how to report the OID but identify the amount to be subtracted as OID adjustment. Similar concept here somewhat of an unusual situation as well. However if the pair reported to you a net amount of OID on the bond reflecting the offset of the gross amount of OID by any acquisition premium no reduction of the amount of OID income reported to you by the pair may be needed on schedule B for the bond. So amortizable bond premium again somewhat of an unusual type of situation for the same rationale that we talked about before because many people that don't invest you know normal investors might be investing in bonds through the format of like mutual funds and ETFs which means you might not have the same kind of issue. 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 the interest but identify the amount to be subtracted as ABP adjustment. So again you're telling the IRS this is what I'm doing and why this is what ties into the 1099 here's my adjustment. However if the pair reported to you a net amount of 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 pair is needed on schedule B for the bond.