The IRS has set certain critical rules regarding the taxability of interest and dividend income of a taxpayer. Some types of incomes are taxable both at state and federal level. Some are taxable only at either of the level. Some are deductible at both the levels while some at either level.
Interest:
Interest received from bank accounts, loans you had given or some other sources.
1. Some dividends are actually treated as interest on your tax return. Distributions from mutual funds, credit unions, co-op banks are actually interest and should be taxed as interest on your return.
2. Interest received on US Obligations such as bonds, notes or bills is taxable on the federal return.
3. Interest received on tax refunds is taxable on federal return.
4. Collected interest on an annuity contract that you have sold before maturity is taxable.
5. Interest received from Certificate of deposits and other deferred interest accounts is also taxable on your tax return.
6. Interest on municipal bonds is generally tax exempt.
7. Interest received on US Obligations is tax free on state or local return.
Types of Dividend income:
1. Ordinary dividend: It is a sum of qualified and non qualified dividends and known as ordinary dividends and taxed as ordinary income.
2. Qualified Dividend: Qualified dividends are taxed at a flat 15% rate. Dividends which are held for at least 60 days are termed as qualified because only then they will be taxed at 15%.
3. Stock dividends and distributions: If you receive dividends from a corporation in the form of stocks it won’t be taxable until you have sold the stocks.
4. Liquidating distributions: If a corporation has liquidated and you receive payments, they are nontaxable to the extent of the basis. Any amount more than the basis will be taxable.
Interest income is generally reported on 1099-INT which you will receive from banks or brokers if you have had an income of more than $10. Box 1 depicts your taxable interest income, Box 3 shows the interest income from U. S. obligations and Box 8 shows tax exempt interest income from Muni bonds.
Similarly, you receive a 109-DIV for your dividend income, which has to be more than $10, from brokers and corporations. Ordinary dividends are reflected in Box 1a, while qualified dividends in Box 1b.
Schedule B should be used to report the interest and dividend income if it is more than $1500.
It is important to get on terms with the forms you receive to understand the correctness of the statements. It also necessary to know how to report each individual type of interest or dividend income because you would not want to be taxed for a wrong amount of income.
