What types of income are considered investment income?
- Interest income
- Dividend income
- Capital appreciation
Capital appreciation - capital gains from the sale of investments, capital gain distributions, and certain types of passive income, such as rental income or income from partnerships.
What form is used to report interest income over $10?
Form 1099-INT
True or False:
All interest income must be reported even if no Form 1099-INT is received.
True
What must taxpayers do if their taxable interest income exceeds $1,500?
Report the interest on Schedule B, Interest and Ordinary Dividends.
How is interest earned on a Certificate of Deposit (CD) treated for tax purposes?
It is generally taxable when the taxpayer receives it or is entitled to receive it without incurring a penalty.
What type of interest is generally exempt from federal income tax?
Interest earned on municipal bonds (debt obligations of state and local governments) is generally exempt from federal income tax.
What is the tax treatment of interest on U.S. Treasury bills, notes, and bonds?
Taxable for federal income tax purposes and exempt from state and local income taxes.
What rules are required for a taxpayer to claim the Education Savings Bond Exclusion?
- Eligible Bonds: Series EE and I bonds issued after 1989
- Ownership: Bonds must be registered in the taxpayer’s or spouse’s name
- Age requirement: Taxpayer must be at least 24 years old before the bond’s issue date
- Qualified expenses: Tuition and fees required for enrollment or attendance at an eligible education institution
- Timing: Bonds must be redeemed in the same year that the qualified expenses are paid
- Filing Status: Not available for married filing separately
What is the filing requirement for dividend income over $1,500?
Must be reported on Schedule B, Interest and Ordinary Dividends.
How are qualified dividends taxed compared to ordinary dividends?
They are taxed at preferential long-term capital gain rates (0%, 15%, or 20%), while ordinary dividends are taxed at the taxpayer’s ordinary income tax rate.
What is the tax treatment of rewards earned from credit and debit card purchases?
They are typically not deemed as taxable income as they are considered rebates.
What are the tax rates for long-term capital gains?
0%, 15%, 20%
These rates apply to different income brackets, with 0% for lower income, 15% for middle income, and 20% for higher income brackets.
What is the maximum tax rate for gain on the sale of collectibles?
28%
What is the maximum tax rate for unrecaptured Sec. 1250 gain?
25%
Unrecaptured Sec. 1250 gain applies to depreciable real estate property.
What are the two most common requirements for dividends to qualify as qualified dividends?
- The dividends must be paid by a U.S. corporation or qualified foreign corporation.
- The taxpayer generally must have held the stock for more than sixty days during the 121-day period that begins sixty days before the ex-dividend date.
How are nondividend distributions generally treated for tax purposes?
As a recovery or return of capital and generally not taxable.
Nondividend distributions reduce the taxpayer’s basis in the corporation’s stock, and once the basis is reduced to zero, any additional distributions are capital gains.
How should amounts received from money market funds be reported?
As dividends, not as interest.
What happens to a shareholder’s basis after receiving a stock dividend?
The total basis stays the same, but it is spread over more shares, reducing the basis per share.
When is a stock dividend taxable?
When the shareholder has the option to receive cash instead of stock.
The stock dividend becomes taxable in the year it is distributed, and the FMV of the newly issued stock is included in gross income.
What must a taxpayer report if they purchase stock through a dividend reinvestment plan at less than fair market value?
The full amount of dividends received, including any portion used to purchase stock, plus the discount received (the difference between the cash invested and the fair market value) as additional dividend income.
How are capital gain distributions from a mutual fund treated for tax purposes?
Always treated as long-term, regardless of the holding period.
In what year must a taxpayer report a dividend declared in October, November, or December but paid in January of the following year?
In the year it was declared.
The dividend is considered received on December 31 of the prior tax year.
What is a constructive distribution?
A misclassified or disguised payment from a corporation to a shareholder that is treated by the IRS as a taxable dividend, often resulting in unexpected tax liability for the shareholder and no deduction for the corporation.
What are examples of constructive distributions?
- Payment of personal expenses
- Unreasonable compensation
- Unreasonable rents
- Cancellation of a shareholder’s debt
- Property transfers for less than FMV
- Below-market or interest-free loans
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Essential Tax Law Figures for Individuals43
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Unit 1: Preliminary Work with Taxpayer Data80
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Unit 2: Determining Filing Status and Residency45
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Unit 3: Dependency Relationships33
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Unit 4: Taxable and Nontaxable Income85
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Unit 5: Investment Income and Expenses32
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Unit 6: Calculating the Basis of Assets37
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Unit 7: Capital Gains and Losses45
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Unit 8: Nonrecognition Property Transactions48
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Unit 9: Rental and Royalty Income52
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Unit 10: Other Taxable Income69
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Unit 11: Adjustments to Gross Income51
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Unit 12: Standard Deduction and Itemized Deductions80
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Unit 13: Individual Tax Credits91
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Unit 14: The ACA and the Premium Tax Credit25
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Unit 15: Additional Taxes and Credits40
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Unit 16: Individual Retirement Accounts77
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Unit 17: Foreign Financial Reporting44
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Unit 18: Estate and Gift Taxes for Individuals52
