Interest, Dividends and Savings Bond Interest

I received dividends from my credit union. How do I report this income?

Certain distributions commonly referred to as dividends are actually interest. They include "dividends" on deposits or share accounts in cooperative banks, credit unions, domestic savings and loan associations, and mutual savings banks.

Interest income can be reported on Form 1040 (PDF), Form 1040A (PDF), or Form 1040EZ (PDF). If your taxable interest income is more than $1,500, be sure to show that income on Form 1040, Schedule B (PDF) or Form 1040A, Schedule 1 (PDF). You cannot file Form 1040EZ if your interest income is more than $1,500. Refer to Tax Topic 403, Interest Received, for additional information on interest income.

Interest/Dividends/Other Types of Income: Savings Bonds

I cashed some Series E, Series EE and Series I savings bonds, how do I report the interest?

If your total taxable interest for the year is more than $1500, you report (and separately identify) the interest on Schedule B of Form 1040 (PDF) or Schedule 1 of Form 1040A (PDF). If your total interest is not more than $1500 for the year, report the savings bond interest with your other interest on the "Interest" line of your tax return. If you do not report the increase in the redemption value of the bonds as interest each year, you must report all of the interest in the year they are cashed or otherwise disposed of. Exception: Some or all of the interest may be excludable from your gross income if you pay qualified higher education expenses for yourself, your spouse, or your dependent during the year.

Reference material:

Publication 550, Investment Income and Expenses

Past Due Return Filers - How the IRS Looks At You

Why Should I File My Tax Return as Soon as Possible?

There are two advantages to filing as soon as possible:

Generally, if a taxpayer is due a refund for withholding or estimated taxes paid, it must be claimed within 3 years of the return due date or risk losing the right to it. The same rule applies to a right to claim a tax credit such as the Earned Income Credit (EIC).

Self-employed persons who do not file a return will not receive credits toward Social Security retirement or disability benefits. Failure to file results in not reporting any self-employment income to the Social Security Administration.

What If I Owe More Than I Can Pay?

Even if a taxpayer doesn't have enough money to pay, returns should be filed to avoid further penalties for failure to file. The IRS will assist in finding a solution to the problem.

The IRS has streamlined its policies to offer alternative account resolutions if a taxpayer cannot pay in full with the return:

The IRS will help to set up an installment agreement when the situation warrants. Installment payments allow taxpayers to pay the tax debt over time.

The IRS will consider whether an offer in compromise is an appropriate solution.

What If I Don't File Voluntarily?

The IRS is taking enforcement steps for those who repeatedly choose not to comply with the law. IRS employees will prepare returns when taxpayers do not file. The returns prepared by the IRS might not give credit for deductions and exemptions a taxpayer may be entitled to receive. Bills will be sent to those taxpayers for the tax due, plus penalties and interest.

People who repeatedly don't comply with the law are subject to additional enforcement measures.

How Can I Avoid Owing Money on Next Year's Return?

Many people don't file tax returns because they don't have enough money to pay the tax they owe. They find out after completing their return that their withholding or Estimated Tax payments do not equal their tax liability.

To help avoid this situation, the IRS can advise taxpayers how to ask an employer to withhold enough tax from their pay. For any income that is not subject to withholding, the IRS can provide information necessary to make quarterly payments to cover any amount to be owed. To make payments electronically, see Payment Options - Ways To Make a Payment or go to the EFTPS Web site.

Changes in financial circumstances could have an impact on taxes. For example, an increase in income, divorce, or selling an asset, may require adjustments to withholding or estimated payments.By taking these steps, taxpayers will be better able to meet their tax obligations and avoid tax day surprises.

Will I Go to Jail?

A long-standing practice of the IRS has been not to recommend criminal prosecution of individuals for failure to file tax returns, provided they voluntarily file, or make arrangements to file, before being notified they are under criminal investigation. The taxpayer must make an honest effort to file a correct return and have income from legal sources. A letter from the IRS concerning taxes is not a notice that a taxpayer is under criminal investigation.

The IRS helps to get people back into the system as part of its long-term plan to improve voluntary tax compliance. The IRS wants to get people back into the system, not prosecute ordinary people who made a mistake. However, flagrant cases involving criminal violations of tax laws will continue to be investigated.

Additional Reading Material:

Filing Late and/or Paying Late
Information Required to Prepare a Return
Examples Showing How Filing A Tax Return Can Benefit You
Getting Free Help
Items That Can Help Reduce the Amount of Tax You Owe
Payment Options
Forms for Filing Your Past Due Returns
Why an Installment Agreement Will Cost You More

Why An Installment Agreement Can Cost You More

Are you aware that interest and penalties do not stop with an installment agreement/payment plan? You can save money by paying the full amount you owe, as quickly as possible; to minimize the interest and penalties you will be charged. Penalties and interest will continue to be charged on the unpaid portion of the debt throughout the duration of the installment agreement/payment plan.

Remember, the interest rate on a loan or credit card may be lower than the combination of penalties and interest imposed by the Internal Revenue Code. It is best that you pay as much as possible before entering into an agreement. See the example showing how borrowing money to pay your taxes could cost you less than an installment agreement.

A Notice of Federal Tax Lien would also be avoided, thereby maintaining your credit standing. Additionally, the installment agreement fee would not apply.

Paying your taxes in full, or partially paying your tax liabilities through liquidating or borrowing against real estate or personal property (bank accounts, stocks, bonds, 401(k) plans, or life insurance), would cost less than an installment agreement.

References/Related Topics

Filing Late and/or Paying Late
Frequently Asked Questions For Past Due Return Filers
How Full Payment of Taxes Saves You Money
Items That Can Help Reduce the Amount of Tax You Owe
Other Ways to Resolve Tax Debt
Payment Options
What Will Happen If You Don't File Your Past Due Return or Contact the IRS
When Do Penalties and Interest Apply

Tax Help - Form 1099-B on Consolidated Statements

Taxpayers who do a significant amount of investing in the stock and bond markets might have an account with a brokerage company for the purpose of executing transactions and managing his or her investment portfolio.

In addition to providing clients with the required tax reporting statements each year (Form 1099-DIV, 1099-INT, 1099-OID, 1099-B, etc.) brokers usually provide each client with a detailed consolidated report of all aspects of his or her account.

The year-end statements provided by financial brokers are a valuable source of information for tax professionals to accurately prepare your yearly returns.

Companies design their reports differently, but in general, most provide the client with the following additional information:

• A listing of dividends and other corporate distributions by security, and the dates distributions were made;


• A listing of taxable and nontaxable interest income by security, and the dates the income was paid;


• A statement of accrued interest on debt instruments sold or purchased during the year;


• A detailed record of trading activity for the year, identifying sales, redemptions, principal payments, and other transactions;


• A detailed record of purchases during the year;


• A detailed list of cost basis of assets sold during the year.

Review these types of documents carefully. It is very easy to overlook a single item when you are going through a consolidated form that is several pages long.

Highlight all items that require entry on your tax return and check off items as you enter them.

Missing an item may cause the IRS to review the entire return.

Tax Debt Help - "Why We Do The Things We Do"

Doing taxes year round gives me the opportunity to see just what kind of situations most folks put themselves into by not filing timely.

One of the most common reasons most folks won't file a return are those dreaded 1099s. Whether it is a 1099-Misc or a 1099-R.

The 1099-Misc is pretty straight-forward and easy to understand, there's been no tax taken out and 90% of the recipients haven't saved or made estimated payments. The biggest thing to worry about in this case is the self-employment tax, which is actually paying into your Social Security account. So in reality, you are just paying yourself.

Last but not least are those 1099-R withdrawals. The IRS wants folks to save for their retirement and they give you tax credits for doing so. But with the economy being such as it is and folks loosing their jobs, it's understandable that sometimes the only place to go for help out of debt is to cash in on those 401K or IRAs. This is where you can really get into trouble and accumulate a large amount of tax debt.

Number one, if you don't have federal and state withheld at the time of withdrawal then you have to account for that at filing.

Number two, the IRS imposes a 10% penalty for early withdrawal and that too can be sizable if you have made a partial or total withdrawal.

Let's look at a worse case scenario.

Say you withdraw only a portion of the balance.....$20,000. No tax is deducted at the time of withdrawal.

Come time to file here's what you can expect:

• You are looking at 15-25% tax rate depending on your bracket. This could be anywhere from $3,000 to 5,000 in tax on Federal alone.




• Now you've got to calculate the State tax. If your State has a rate of 7.5%, then your having to pay an additional $1,500.




• And to top it all off, you have to calculate the IRS 10% penalty of $2,000.

Now let me show you just how much of that $20,000 you are actually getting to help pay off those debts you need to pay.

• $20,000 Withdrawal amount


• - 5,000 Federal tax due @ 25% tax rate


• - 1,500 State tax due @ 7.5% rate


• - 2,000 10% penalty to the IRS

Of the $20,000 that you withdrew, you have lost 57.5% or $11,500 of your withdrawal after tax and penalty.

To compound the situation, if you fail to file a return for 3 years, then you're looking at a failure to file penalty along with interest accruing for that three year period. We won't even do the math on that one.

So is it really worth making that withdrawal when you're going to loose over 50% of what you've worked so hard to save. There are two things that you can be sure of....."death and taxes" and they both can be devastating.

Like I always say, "it's better to be proactive than reactive"!