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Anatomy of a Tax Return: Part 6 Schedule B

Ok...so...remember like 5 months ago when I promised to be back in a week to talk about Schedule B? Me too. I got a little distracted. Busy season and all. I'm so sorry I kept you waiting so long, but since literally no one reads this blog, I thought it would be ok if I took a small break.




My goal is to get a few posts written so I can build up a backlog for the next time I need a busy season break, but we will see how it goes. And if there is a topic you want to read about, send it my way.


For now, let's dive in to the best IRS schedule: Schedule B for the 1040.


The last few posts have been taking us line by line through the 1040. We have made it all the way to Line 2 and 3!!


This is where we report interest and dividends. Do you see that exciting bubble on the left that says "Attach Sch. B if required."? Schedule B is really just a listing of the individual interest and dividend items that make up the amounts you report on the 1040 Lines 2b and 3b.


When is Schedule B Required?


Since it says "if required," I thought I'd start with that as a first step. If you just have a small amount of interest on a savings account, you may not need to complete Schedule B. However, the threshold for reporting on Schedule B is fairly low, so definitely most of my clients file it.


The requirements include:

  1. Dividend or interest income exceeding $1,500

  2. Interest from a seller-financed mortgage on a personal residence

  3. Accrued bond interest

  4. OID

  5. Interest from amortizable bond premiums (that is different from a 1099)

  6. You received income as a nominee

  7. You have signature authority over a foreign bank account or received a distribution from a foreign trust or were a grantor to a foreign trust.

Since we are here, that last one (#7) doesn't really have much to do with interest or dividend income. It kind of seems like they just needed a place to put these questions, and Schedule B had some room at the bottom, so they added Part III.



Even though it doesn't really fit, these questions are VERY IMPORTANT! If you had signature authority over a foreign bank account, you really need to answer this question Yes and make sure you are complying wit the FinCen Form 114 filing requirements. Same goes for a foreign trust. While this is important enough for a separate post entirely, just be aware that the penalty for missing this is very high ($10,000 or more), and doesn't depend on the value of the account


Now I got excited and went out of order, so let's get back on track and get to Part I of Schedule B.


Interest


First, let's discuss interest. Taxable interest income is reported on Part I of Schedule B.



It's usually pretty straight-forward, even for taxpayers with fairly complicated tax returns. You just list the name of the payor.and the amount, and then add it all up. You can see there are some excludable interest income types that go on Line 3 and get subtracted out, and then the total goes on Line 4. That amount also goes to the front of the 1040 on Line 2b.


Most of the time, these amounts come straight from a 1099-INT and its as simple as copying the numbers. However, just because you didn't get a 1099-INT doesn't mean your interest income isn't taxable. If the total interest is less than $10, it often won't be reported on a 1099, but it is still income.


But what if I have more interest income sources than fit on the schedule? Well, Richie Rich, you just add a statement to your return that summarizes all the items, report the total on Schedule B, and then go on your merry way.


Keen observers may have noticed that there is also a Line 2a on the 1040. That is where we report tax-exempt interest income. There is no place for this information on Schedule B, so usually the individual sources of tax-exempt interest are listed on a supplemental schedule and then the total is reported on Line 2a.


That number on Line 2a is then used for absolutely nothing, and the IRS is really just making you report it because they are nosy and because they like to see us suffer.


Well, it could affect your alternative minimum tax (AMT). What''s AMT? Oh, well, someone decided that the tax code was just too simple and didn't want to let that stand. So, they came up with a completely different set of rules that you have to use to recalculate your income tax. Then you compare it to your regular income tax and see which one is higher, and then you make sure you pay the higher one. We will get to that someday, I'm sure. For now, the current set of tax rules have made it so very few individual taxpayers are subject to AMT.




Tax-exempt interest income could also affect your state income tax returns, if you are unfortunate enough to live in a state that has an income tax.



There are surely some other valid reasons we need to report tax-exempt income, but mostly it just sits there looking nice on Line 2a and not affecting your tax calculations.


Dividends


Part II of the Schedule B is where we report your dividend income. Just like Part I, you list the source and amount of your total dividend income and then add them all up at the bottom and report that total on Line 3b of the 1040.


Just like Part I, the information usually comes from a 1099, although this time its a 1099-DIV. Also just like Part I, there is a secret set of information that doesn't go on Schedule B but does go on Line 3a of the 1040.


In this case, that number is the amount of your "qualified dividends." A "Qualfiied Dividend" is paid on stock from a US Corporation or certain qualified foreign corporations and that stock was held for more than 60 days before the dividend was paid.


These "Qualified Dividends" qualify for the preferential capital gains tax rate, which ranges from 0-20%, compared to the ordinary tax rates that range as high as 37% for 2022.


Whether a dividend received is qualified is usually determined based on the 1099-DIV reporting, although there are occasions where a dividend was not reported on a 1099. As with tax-exempt interest, a statement showing the source and amount of each dividend is usually attached to the return to supplement the Schedule B reporting.


While we could dive deeper into the intricacies of bond interest, OID, foreign dividends, etc., I thinkI will save those for another post in the future. For now, Schedule B is probably the easiest and least complicated tax form outside of a 990-N. Oh, maybe I should talk about 990-N sometime too.


Come back soon for some retirement distributions. Those can cause some problems.

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