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Www hnr block com 1. Www hnr block com   Investment Income Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: General InformationSSN for joint account. Www hnr block com Custodian account for your child. Www hnr block com Penalty for failure to supply SSN. Www hnr block com Certification. Www hnr block com Underreported interest and dividends. Www hnr block com How to stop backup withholding due to underreporting. Www hnr block com How to stop backup withholding due to an incorrect identification number. Www hnr block com Reporting backup withholding. Www hnr block com Nonresident aliens. Www hnr block com Penalties. Www hnr block com Savings account with parent as trustee. Www hnr block com Interest IncomeInterest not reported on Form 1099-INT. Www hnr block com Nominees. Www hnr block com Incorrect amount. Www hnr block com Information reporting requirement. Www hnr block com Taxable Interest — General Below-Market Loans U. Www hnr block com S. Www hnr block com Savings Bonds U. Www hnr block com S. Www hnr block com Treasury Bills, Notes, and Bonds Bonds Sold Between Interest Dates Insurance State or Local Government Obligations Discount on Debt InstrumentsOriginal Issue Discount (OID) Market Discount Bonds Discount on Short-Term Obligations Election To Report All Interest as OID When To Report Interest IncomeConstructive receipt. Www hnr block com How To Report Interest IncomeSchedule B (Form 1040A or 1040). Www hnr block com Worksheet for savings bonds distributed from a retirement or profit-sharing plan. Www hnr block com File Form 1099-INT with the IRS. Www hnr block com Dividends and Other DistributionsDividends not reported on Form 1099-DIV. Www hnr block com Nominees. Www hnr block com Ordinary Dividends Capital Gain Distributions Nondividend Distributions Liquidating Distributions Distributions of Stock and Stock Rights Other Distributions How To Report Dividend IncomeElection. Www hnr block com Independent contractor. Www hnr block com Investment interest deducted. Www hnr block com Exception 1. Www hnr block com Exception 2. Www hnr block com Undistributed capital gains. Www hnr block com File Form 1099-DIV with the IRS. Www hnr block com Stripped Preferred Stock REMICs, FASITs, and Other CDOsREMICs Collateralized Debt Obligations (CDOs) FASITs S CorporationsLimit on losses and deductions. Www hnr block com Passive activity losses. Www hnr block com Form 8582. Www hnr block com Investment ClubsInvestments in name of member. Www hnr block com Tax Treatment of the Club Topics - This chapter discusses: Interest Income , Discount on Debt Instruments , When To Report Interest Income , How To Report Interest Income , Dividends and Other Distributions , How To Report Dividend Income , Stripped Preferred Stock , Real estate mortgage investment conduits (REMICs), financial asset securitization investment trusts (FASITs), and other collateralized debt obligations (CDOs) , S Corporations , and Investment Clubs . Www hnr block com Useful Items - You may want to see: Publication 525 Taxable and Nontaxable Income 537 Installment Sales 590 Individual Retirement Arrangements (IRAs) 925 Passive Activity and At-Risk Rules 1212 Guide to Original Issue Discount (OID) Instruments Form (and Instructions) Schedule B (Form 1040A or 1040) Interest and Ordinary Dividends Schedule D (Form 1040) Capital Gains and Losses 1040 U. Www hnr block com S. Www hnr block com Individual Income Tax Return 1040A U. Www hnr block com S. Www hnr block com Individual Income Tax Return 1040EZ Income Tax Return for Single and Joint Filers With No Dependents 1099 General Instructions for Certain Information Returns 2439 Notice to Shareholder of Undistributed Long-Term Capital Gains 3115 Application for Change in Accounting Method 6251 Alternative Minimum Tax — Individuals 8582 Passive Activity Loss Limitations 8615 Tax for Certain Children Who Have Unearned Income 8814 Parents' Election To Report Child's Interest and Dividends 8815 Exclusion of Interest From Series EE and I U. Www hnr block com S. Www hnr block com Savings Bonds Issued After 1989 8818 Optional Form To Record Redemption of Series EE and I U. Www hnr block com S. Www hnr block com Savings Bonds Issued After 1989 8824 Like-Kind Exchanges 8949 Sales and Other Dispositions of Capital Assets 8960 Net Investment Income Tax—Individuals, Estates, and Trusts See chapter 5, How To Get Tax Help , for information about getting these publications and forms. Www hnr block com General Information A few items of general interest are covered here. Www hnr block com Recordkeeping. Www hnr block com You should keep a list showing sources and investment income amounts you receive during the year. Www hnr block com Also keep the forms you receive showing your investment income (Forms 1099-INT, Interest Income, and 1099-DIV, Dividends and Distributions, for example) as an important part of your records. Www hnr block com Net investment income tax (NIIT). Www hnr block com   Beginning in 2013, you may be subject to the NIIT. Www hnr block com The NIIT is a 3. Www hnr block com 8% tax on the lesser of your net investment income or the amount of your modified adjusted gross income (MAGI) that is over a threshold amount based on your filing status. Www hnr block com    Filing Status Threshold Amount Married filing jointly $250,000 Married filing separately $125,000 Single $200,000 Head of household (with qualifying person) $200,000 Qualifying Widow(er) with dependent child $250,000    For more information, see Form 8960 and Instructions for Form 8960. Www hnr block com Tax on unearned income of certain children. Www hnr block com   Part of a child's 2013 unearned income may be taxed at the parent's tax rate. Www hnr block com This may happen if all of the following are true. Www hnr block com The child had more than $2,000 of unearned income. Www hnr block com The child is required to file a tax return. Www hnr block com The child was: Under age 18 at the end of 2013, Age 18 at the end of 2013 and did not have earned income that was more than half of the child's support, or A full-time student over age 18 and under age 24 at the end of 2013 and did not have earned income that was more than half of the child's support. Www hnr block com At least one of the child's parents was alive at the end of 2013. Www hnr block com The child does not file a joint return for 2013. Www hnr block com A child born on January 1, 1996, is considered to be age 18 at the end of 2013; a child born on January 1, 1995, is considered to be age 19 at the end of 2013; a child born on January 1, 1990, is considered to be age 24 at the end of 2013. Www hnr block com   If all of these statements are true, Form 8615 must be completed and attached to the child's tax return. Www hnr block com If any of these statements is not true, Form 8615 is not required and the child's income is taxed at his or her own tax rate. Www hnr block com    However, the parent can choose to include the child's interest and dividends on the parent's return if certain requirements are met. Www hnr block com Use Form 8814 for this purpose. Www hnr block com   For more information about the tax on unearned income of children and the parents' election, see Publication 929, Tax Rules for Children and Dependents. Www hnr block com Beneficiary of an estate or trust. Www hnr block com   Interest, dividends, and other investment income you receive as a beneficiary of an estate or trust is generally taxable income. Www hnr block com You should receive a Schedule K-1 (Form 1041), Beneficiary's Share of Income, Deductions, Credits, etc. Www hnr block com , from the fiduciary. Www hnr block com Your copy of Schedule K-1 (Form 1041) and its instructions will tell you where to report the income on your Form 1040. Www hnr block com Social security number (SSN). Www hnr block com   You must give your name and SSN or individual tax identification number (ITIN) to any person required by federal tax law to make a return, statement, or other document that relates to you. Www hnr block com This includes payers of interest and dividends. Www hnr block com If you do not give your SSN or ITIN to the payer of interest, you may have to pay a penalty. Www hnr block com SSN for joint account. Www hnr block com   If the funds in a joint account belong to one person, list that person's name first on the account and give that person's SSN to the payer. Www hnr block com (For information on who owns the funds in a joint account, see Joint accounts , later. Www hnr block com ) If the joint account contains combined funds, give the SSN of the person whose name is listed first on the account. Www hnr block com This is because only one name and SSN can be shown on Form 1099. Www hnr block com   These rules apply both to joint ownership by a married couple and to joint ownership by other individuals. Www hnr block com For example, if you open a joint savings account with your child using funds belonging to the child, list the child's name first on the account and give the child's SSN. Www hnr block com Custodian account for your child. Www hnr block com   If your child is the actual owner of an account that is recorded in your name as custodian for the child, give the child's SSN to the payer. Www hnr block com For example, you must give your child's SSN to the payer of dividends on stock owned by your child, even though the dividends are paid to you as custodian. Www hnr block com Penalty for failure to supply SSN. Www hnr block com   You will be subject to a penalty if, when required, you fail to: Include your SSN on any return, statement, or other document, Give your SSN to another person who must include it on any return, statement, or other document, or Include the SSN of another person on any return, statement, or other document. Www hnr block com The penalty is $50 for each failure up to a maximum penalty of $100,000 for any calendar year. Www hnr block com   You will not be subject to this penalty if you can show that your failure to provide the SSN was due to reasonable cause and not to willful neglect. Www hnr block com   If you fail to supply an SSN, you may also be subject to backup withholding. Www hnr block com Backup withholding. Www hnr block com   Your investment income is generally not subject to regular withholding. Www hnr block com However, it may be subject to backup withholding to ensure that income tax is collected on the income. Www hnr block com Under backup withholding, the bank, broker, or other payer of interest, original issue discount (OID), dividends, cash patronage dividends, or royalties must withhold, as income tax, on the amount you are paid, applying the appropriate withholding rate. Www hnr block com   Backup withholding applies if: You do not give the payer your identification number (either a social security number or an employer identification number) in the required manner, The IRS notifies the payer that you gave an incorrect identification number, The IRS notifies the payer that you are subject to backup withholding on interest or dividends because you have underreported interest or dividends on your income tax return, or You are required, but fail, to certify that you are not subject to backup withholding for the reason described in (3). Www hnr block com Certification. Www hnr block com   For new accounts paying interest or dividends, you must certify under penalties of perjury that your SSN is correct and that you are not subject to backup withholding. Www hnr block com Your payer will give you a Form W-9, Request for Taxpayer Identification Number and Certification, or similar form, to make this certification. Www hnr block com If you fail to make this certification, backup withholding may begin immediately on your new account or investment. Www hnr block com Underreported interest and dividends. Www hnr block com   You will be considered to have underreported your interest and dividends if the IRS has determined for a tax year that: You failed to include any part of a reportable interest or dividend payment required to be shown on your return, or You were required to file a return and to include a reportable interest or dividend payment on that return, but you failed to file the return. Www hnr block com How to stop backup withholding due to underreporting. Www hnr block com   If you have been notified that you underreported interest or dividends, you can request a determination from the IRS to prevent backup withholding from starting or to stop backup withholding once it has begun. Www hnr block com You must show that at least one of the following situations applies. Www hnr block com No underreporting occurred. Www hnr block com You have a bona fide dispute with the IRS about whether underreporting occurred. Www hnr block com Backup withholding will cause or is causing an undue hardship, and it is unlikely that you will underreport interest and dividends in the future. Www hnr block com You have corrected the underreporting by filing a return if you did not previously file one and by paying all taxes, penalties, and interest due for any underreported interest or dividend payments. Www hnr block com   If the IRS determines that backup withholding should stop, it will provide you with a certification and will notify the payers who were sent notices earlier. Www hnr block com How to stop backup withholding due to an incorrect identification number. Www hnr block com   If you have been notified by a payer that you are subject to backup withholding because you have provided an incorrect SSN or employer identification number, you can stop it by following the instructions the payer gives you. Www hnr block com Reporting backup withholding. Www hnr block com   If backup withholding is deducted from your interest or dividend income or other reportable payment, the bank or other business must give you an information return for the year (for example, a Form 1099-INT) indicating the amount withheld. Www hnr block com The information return will show any backup withholding as “Federal income tax withheld. Www hnr block com ” Nonresident aliens. Www hnr block com    Generally, payments made to nonresident aliens are not subject to backup withholding. Www hnr block com You can use Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding, to certify exempt status. Www hnr block com However, this does not exempt you from the 30% (or lower treaty) withholding rate that may apply to your investment income. Www hnr block com For information on the 30% rate, see Publication 519, U. Www hnr block com S. Www hnr block com Tax Guide for Aliens. Www hnr block com Penalties. Www hnr block com   There are civil and criminal penalties for giving false information to avoid backup withholding. Www hnr block com The civil penalty is $500. Www hnr block com The criminal penalty, upon conviction, is a fine of up to $1,000, or imprisonment of up to 1 year, or both. Www hnr block com Where to report investment income. Www hnr block com   Table 1-1 gives an overview of the forms and schedules to use to report some common types of investment income. Www hnr block com But see the rest of this publication for detailed information about reporting investment income. Www hnr block com Joint accounts. Www hnr block com   If two or more persons hold property (such as a savings account, bond, or stock) as joint tenants, tenants by the entirety, or tenants in common, each person's share of any interest or dividends from the property is determined by local law. Www hnr block com Community property states. Www hnr block com   If you are married and receive a distribution that is community income, one-half of the distribution is generally considered to be received by each spouse. Www hnr block com If you file separate returns, you must each report one-half of any taxable distribution. Www hnr block com See Publication 555, Community Property, for more information on community income. Www hnr block com   If the distribution is not considered community property and you and your spouse file separate returns, each of you must report your separate taxable distributions. Www hnr block com Example. Www hnr block com You and your spouse have a joint money market account. Www hnr block com Under state law, half the income from the account belongs to you, and half belongs to your spouse. Www hnr block com If you file separate returns, you each report half the income. Www hnr block com Income from property given to a child. Www hnr block com   Property you give as a parent to your child under the Model Gifts of Securities to Minors Act, the Uniform Gifts to Minors Act, or any similar law becomes the child's property. Www hnr block com   Income from the property is taxable to the child, except that any part used to satisfy a legal obligation to support the child is taxable to the parent or guardian having that legal obligation. Www hnr block com Savings account with parent as trustee. Www hnr block com   Interest income from a savings account opened for a minor child, but placed in the name and subject to the order of the parents as trustees, is taxable to the child if, under the law of the state in which the child resides, both of the following are true. Www hnr block com The savings account legally belongs to the child. Www hnr block com The parents are not legally permitted to use any of the funds to support the child. Www hnr block com Table 1-1. Www hnr block com Where To Report Common Types of Investment Income (For detailed information about reporting investment income, see the rest of this publication, especially How To Report Interest Income and How To Report Dividend Income in chapter 1. Www hnr block com ) Type of Income If you file Form 1040, report on . Www hnr block com . Www hnr block com . Www hnr block com If you can file Form 1040A, report on . Www hnr block com . Www hnr block com . Www hnr block com If you can file Form 1040EZ, report on . Www hnr block com . Www hnr block com . Www hnr block com Tax-exempt interest (Form 1099-INT, box 8) Line 8b Line 8b Space to the left of line 2 (enter “TEI” and the amount) Taxable interest that totals $1,500 or less Line 8a (You may need to file Schedule B as well. Www hnr block com ) Line 8a (You may need to file Schedule B as well. Www hnr block com ) Line 2 Taxable interest that totals more than $1,500 Line 8a; also use Schedule B, line 1 Line 8a; also use Schedule B, line 1   Savings bond interest you will exclude because of higher education expenses Schedule B; also use Form 8815 Schedule B; also use Form 8815   Ordinary dividends that total $1,500 or less Line 9a (You may need to file Schedule B as well. Www hnr block com ) Line 9a (You may need to file Schedule B as well. Www hnr block com )   Ordinary dividends that total more than $1,500 Line 9a; also use Schedule B, line 5 Line 9a; also use Schedule B, line 5   Qualified dividends (if you do not have to file Schedule D) Line 9b; also use the Qualified Dividends and Capital Gain Tax Worksheet, line 2 Line 9b; also use the Qualified Dividends and Capital Gain Tax Worksheet, line 2   Qualified dividends (if you have to file Schedule D) Line 9b; also use the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet, line 2 You cannot use Form 1040A    You cannot use Form 1040EZ Capital gain distributions (if you do not have to file Schedule D) Line 13; also use the Qualified Dividends and Capital Gain Tax Worksheet, line 3 Line 10; also use the Qualified Dividends and Capital Gain Tax Worksheet, line 3   Capital gain distributions (if you have to file Schedule D) Schedule D, line 13; also use the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet     Section 1250, 1202, or collectibles gain (Form 1099-DIV, box 2b, 2c, or 2d) Form 8949 and Schedule D     Nondividend distributions (Form 1099-DIV, box 3) Generally not reported*     Undistributed capital gains (Form 2439, boxes 1a - 1d) Schedule D     Gain or loss from sales of stocks or bonds Line 13; also use Form 8949, Schedule D, and the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet You cannot use Form 1040A   Gain or loss from exchanges of like-kind investment property Line 13; also use Schedule D, Form 8824, and the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet     *Report any amounts in excess of your basis in your mutual fund shares on Form 8949. Www hnr block com Use Part II if you held the shares more than 1 year. Www hnr block com Use Part I if you held your mutual fund shares 1 year or less. Www hnr block com For details on Form 8949, see Reporting Capital Gains and Losses in chapter 4, and the Instructions for Form 8949. Www hnr block com Accuracy-related penalty. Www hnr block com   An accuracy-related penalty of 20% can be charged for underpayments of tax due to negligence or disregard of rules or regulations or substantial understatement of tax. Www hnr block com For information on the penalty and any interest that applies, see Penalties in chapter 2. Www hnr block com Interest Income This section discusses the tax treatment of different types of interest income. Www hnr block com In general, any interest that you receive or that is credited to your account and can be withdrawn is taxable income. Www hnr block com (It does not have to be entered in your passbook. Www hnr block com ) Exceptions to this rule are discussed later. Www hnr block com Form 1099-INT. Www hnr block com   Interest income is generally reported to you on Form 1099-INT, or a similar statement, by banks, savings and loans, and other payers of interest. Www hnr block com This form shows you the interest you received during the year. Www hnr block com Keep this form for your records. Www hnr block com You do not have to attach it to your tax return. Www hnr block com   Report on your tax return the total interest income you receive for the tax year. Www hnr block com Interest not reported on Form 1099-INT. Www hnr block com   Even if you do not receive Form 1099-INT, you must still report all of your interest income. Www hnr block com For example, you may receive distributive shares of interest from partnerships or S corporations. Www hnr block com This interest is reported to you on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. Www hnr block com , and Schedule K-1 (Form 1120S), Shareholder's Share of Income, Deductions, Credits, etc. Www hnr block com Nominees. Www hnr block com   Generally, if someone receives interest as a nominee for you, that person must give you a Form 1099-INT showing the interest received on your behalf. Www hnr block com   If you receive a Form 1099-INT that includes amounts belonging to another person, see the discussion on Nominee distributions , later, under How To Report Interest Income. Www hnr block com Incorrect amount. Www hnr block com   If you receive a Form 1099-INT that shows an incorrect amount (or other incorrect information), you should ask the issuer for a corrected form. Www hnr block com The new Form 1099-INT you receive will be marked “Corrected. Www hnr block com ” Form 1099-OID. Www hnr block com   Reportable interest income also may be shown on Form 1099-OID, Original Issue Discount. Www hnr block com For more information about amounts shown on this form, see Original Issue Discount (OID) , later in this chapter. Www hnr block com Exempt-interest dividends. Www hnr block com   Exempt-interest dividends you receive from a mutual fund or other regulated investment company, including those received from a qualified fund of funds in any tax year beginning after December 22, 2010, are not included in your taxable income. Www hnr block com (However, see Information reporting requirement , next. Www hnr block com ) Exempt-interest dividends should be shown in box 10 of Form 1099-DIV. Www hnr block com You do not reduce your basis for distributions that are exempt-interest dividends. Www hnr block com Information reporting requirement. Www hnr block com   Although exempt-interest dividends are not taxable, you must show them on your tax return if you have to file. Www hnr block com This is an information reporting requirement and does not change the exempt-interest dividends into taxable income. Www hnr block com See How To Report Interest Income , later. Www hnr block com Note. Www hnr block com Exempt-interest dividends paid from specified private activity bonds may be subject to the alternative minimum tax. Www hnr block com The exempt-interest dividends subject to the alternative minimum tax are shown in box 11 of Form 1099-DIV. Www hnr block com See Form 6251 and its instructions for more information about this tax. Www hnr block com Private activity bonds are discussed later under State or Local Government Obligations. Www hnr block com Interest on VA dividends. Www hnr block com   Interest on insurance dividends left on deposit with the Department of Veterans Affairs (VA) is not taxable. Www hnr block com This includes interest paid on dividends on converted United States Government Life Insurance policies and on National Service Life Insurance policies. Www hnr block com Individual retirement arrangements (IRAs). Www hnr block com   Interest on a Roth IRA generally is not taxable. Www hnr block com Interest on a traditional IRA is tax deferred. Www hnr block com You generally do not include it in your income until you make withdrawals from the IRA. Www hnr block com See Publication 590 for more information. Www hnr block com Taxable Interest — General Taxable interest includes interest you receive from bank accounts, loans you make to others, and other sources. Www hnr block com The following are some sources of taxable interest. Www hnr block com Dividends that are actually interest. Www hnr block com   Certain distributions commonly called dividends are actually interest. Www hnr block com You must report as interest so-called “dividends” on deposits or on share accounts in: Cooperative banks, Credit unions, Domestic building and loan associations, Domestic savings and loan associations, Federal savings and loan associations, and Mutual savings banks. Www hnr block com  The “dividends” will be shown as interest income on Form 1099-INT. Www hnr block com Money market funds. Www hnr block com   Money market funds are offered by nonbank financial institutions such as mutual funds and stock brokerage houses, and pay dividends. Www hnr block com Generally, amounts you receive from money market funds should be reported as dividends, not as interest. Www hnr block com Certificates of deposit and other deferred interest accounts. Www hnr block com   If you open any of these accounts, interest may be paid at fixed intervals of 1 year or less during the term of the account. Www hnr block com You generally must include this interest in your income when you actually receive it or are entitled to receive it without paying a substantial penalty. Www hnr block com The same is true for accounts that mature in 1 year or less and pay interest in a single payment at maturity. Www hnr block com If interest is deferred for more than 1 year, see Original Issue Discount (OID) , later. Www hnr block com Interest subject to penalty for early withdrawal. Www hnr block com   If you withdraw funds from a deferred interest account before maturity, you may have to pay a penalty. Www hnr block com You must report the total amount of interest paid or credited to your account during the year, without subtracting the penalty. Www hnr block com See Penalty on early withdrawal of savings under How To Report Interest Income, later, for more information on how to report the interest and deduct the penalty. Www hnr block com Money borrowed to invest in certificate of deposit. Www hnr block com   The interest you pay on money borrowed from a bank or savings institution to meet the minimum deposit required for a certificate of deposit from the institution and the interest you earn on the certificate are two separate items. Www hnr block com You must report the total interest you earn on the certificate in your income. Www hnr block com If you itemize deductions, you can deduct the interest you pay as investment interest, up to the amount of your net investment income. Www hnr block com See Interest Expenses in chapter 3. Www hnr block com Example. Www hnr block com You deposited $5,000 with a bank and borrowed $5,000 from the bank to make up the $10,000 minimum deposit required to buy a 6-month certificate of deposit. Www hnr block com The certificate earned $575 at maturity in 2013, but you received only $265, which represented the $575 you earned minus $310 interest charged on your $5,000 loan. Www hnr block com The bank gives you a Form 1099-INT for 2013 showing the $575 interest you earned. Www hnr block com The bank also gives you a statement showing that you paid $310 interest for 2013. Www hnr block com You must include the $575 in your income. Www hnr block com If you itemize your deductions on Schedule A (Form 1040), Itemized Deductions, you can deduct $310, subject to the net investment income limit. Www hnr block com Gift for opening account. Www hnr block com   If you receive noncash gifts or services for making deposits or for opening an account in a savings institution, you may have to report the value as interest. Www hnr block com   For deposits of less than $5,000, gifts or services valued at more than $10 must be reported as interest. Www hnr block com For deposits of $5,000 or more, gifts or services valued at more than $20 must be reported as interest. Www hnr block com The value is determined by the cost to the financial institution. Www hnr block com Example. Www hnr block com You open a savings account at your local bank and deposit $800. Www hnr block com The account earns $20 interest. Www hnr block com You also receive a $15 calculator. Www hnr block com If no other interest is credited to your account during the year, the Form 1099-INT you receive will show $35 interest for the year. Www hnr block com You must report $35 interest income on your tax return. Www hnr block com Interest on insurance dividends. Www hnr block com   Interest on insurance dividends left on deposit with an insurance company that can be withdrawn annually is taxable to you in the year it is credited to your account. Www hnr block com However, if you can withdraw it only on the anniversary date of the policy (or other specified date), the interest is taxable in the year that date occurs. Www hnr block com Prepaid insurance premiums. Www hnr block com   Any increase in the value of prepaid insurance premiums, advance premiums, or premium deposit funds is interest if it is applied to the payment of premiums due on insurance policies or made available for you to withdraw. Www hnr block com U. Www hnr block com S. Www hnr block com obligations. Www hnr block com   Interest on U. Www hnr block com S. Www hnr block com obligations, such as U. Www hnr block com S. Www hnr block com Treasury bills, notes, and bonds, issued by any agency or instrumentality of the United States is taxable for federal income tax purposes. Www hnr block com Interest on tax refunds. Www hnr block com   Interest you receive on tax refunds is taxable income. Www hnr block com Interest on condemnation award. Www hnr block com   If the condemning authority pays you interest to compensate you for a delay in payment of an award, the interest is taxable. Www hnr block com Installment sale payments. Www hnr block com   If a contract for the sale or exchange of property provides for deferred payments, it also usually provides for interest payable with the deferred payments. Www hnr block com That interest is taxable when you receive it. Www hnr block com If little or no interest is provided for in a deferred payment contract, part of each payment may be treated as interest. Www hnr block com See Unstated Interest and Original Issue Discount (OID) in Publication 537. Www hnr block com Interest on annuity contract. Www hnr block com   Accumulated interest on an annuity contract you sell before its maturity date is taxable. Www hnr block com Usurious interest. Www hnr block com   Usurious interest is interest charged at an illegal rate. Www hnr block com This is taxable as interest unless state law automatically changes it to a payment on the principal. Www hnr block com Interest income on frozen deposits. Www hnr block com   Exclude from your gross income interest on frozen deposits. Www hnr block com A deposit is frozen if, at the end of the year, you cannot withdraw any part of the deposit because: The financial institution is bankrupt or insolvent, or The state in which the institution is located has placed limits on withdrawals because other financial institutions in the state are bankrupt or insolvent. Www hnr block com   The amount of interest you must exclude is the interest that was credited on the frozen deposits minus the sum of: The net amount you withdrew from these deposits during the year, and The amount you could have withdrawn as of the end of the year (not reduced by any penalty for premature withdrawals of a time deposit). Www hnr block com If you receive a Form 1099-INT for interest income on deposits that were frozen at the end of 2013, see Frozen deposits under How To Report Interest Income for information about reporting this interest income exclusion on your tax return. Www hnr block com   The interest you exclude is treated as credited to your account in the following year. Www hnr block com You must include it in income in the year you can withdraw it. Www hnr block com Example. Www hnr block com $100 of interest was credited on your frozen deposit during the year. Www hnr block com You withdrew $80 but could not withdraw any more as of the end of the year. Www hnr block com You must include $80 in your income and exclude $20 from your income for the year. Www hnr block com You must include the $20 in your income for the year you can withdraw it. Www hnr block com Bonds traded flat. Www hnr block com    If you buy a bond at a discount when interest has been defaulted or when the interest has accrued but has not been paid, the transaction is described as trading a bond flat. Www hnr block com The defaulted or unpaid interest is not income and is not taxable as interest if paid later. Www hnr block com When you receive a payment of that interest, it is a return of capital that reduces the remaining cost basis of your bond. Www hnr block com Interest that accrues after the date of purchase, however, is taxable interest income for the year received or accrued. Www hnr block com See Bonds Sold Between Interest Dates , later in this chapter. Www hnr block com Below-Market Loans If you make a below-market gift or demand loan, you must report as interest income any forgone interest (defined later) from that loan. Www hnr block com The below-market loan rules and exceptions are described in this section. Www hnr block com For more information, see section 7872 of the Internal Revenue Code and its regulations. Www hnr block com If you receive a below-market loan, you may be able to deduct the forgone interest as well as any interest you actually paid, but not if it is personal interest. Www hnr block com Loans subject to the rules. Www hnr block com   The rules for below-market loans apply to: Gift loans, Pay-related loans, Corporation-shareholder loans, Tax avoidance loans, and Certain loans made to qualified continuing care facilities under a continuing care contract. Www hnr block com A pay-related loan is any below-market loan between an employer and an employee or between an independent contractor and a person for whom the contractor provides services. Www hnr block com A tax avoidance loan is any below-market loan where the avoidance of federal tax is one of the main purposes of the interest arrangement. Www hnr block com Forgone interest. Www hnr block com   For any period, forgone interest is: The amount of interest that would be payable for that period if interest accrued on the loan at the applicable federal rate and was payable annually on December 31, minus Any interest actually payable on the loan for the period. Www hnr block com Applicable federal rate. Www hnr block com   Applicable federal rates are published by the IRS each month in the Internal Revenue Bulletin. Www hnr block com Some IRS offices have these bulletins available for research. Www hnr block com See chapter 5, How To Get Tax Help , for other ways to get this information. Www hnr block com Rules for below-market loans. Www hnr block com   The rules that apply to a below-market loan depend on whether the loan is a gift loan, demand loan, or term loan. Www hnr block com Gift and demand loans. Www hnr block com   A gift loan is any below-market loan where the forgone interest is in the nature of a gift. Www hnr block com   A demand loan is a loan payable in full at any time upon demand by the lender. Www hnr block com A demand loan is a below-market loan if no interest is charged or if interest is charged at a rate below the applicable federal rate. Www hnr block com   A demand loan or gift loan that is a below-market loan is generally treated as an arm's-length transaction in which the lender is treated as having made: A loan to the borrower in exchange for a note that requires the payment of interest at the applicable federal rate, and An additional payment to the borrower in an amount equal to the forgone interest. Www hnr block com The borrower is generally treated as transferring the additional payment back to the lender as interest. Www hnr block com The lender must report that amount as interest income. Www hnr block com   The lender's additional payment to the borrower is treated as a gift, dividend, contribution to capital, pay for services, or other payment, depending on the substance of the transaction. Www hnr block com The borrower may have to report this payment as taxable income, depending on its classification. Www hnr block com These transfers are considered to occur annually, generally on December 31. Www hnr block com Term loans. Www hnr block com   A term loan is any loan that is not a demand loan. Www hnr block com A term loan is a below-market loan if the amount of the loan is more than the present value of all payments due under the loan. Www hnr block com   A lender who makes a below-market term loan other than a gift loan is treated as transferring an additional lump-sum cash payment to the borrower (as a dividend, contribution to capital, etc. Www hnr block com ) on the date the loan is made. Www hnr block com The amount of this payment is the amount of the loan minus the present value, at the applicable federal rate, of all payments due under the loan. Www hnr block com An equal amount is treated as original issue discount (OID). Www hnr block com The lender must report the annual part of the OID as interest income. Www hnr block com The borrower may be able to deduct the OID as interest expense. Www hnr block com See Original Issue Discount (OID) , later. Www hnr block com Exceptions to the below-market loan rules. Www hnr block com   Exceptions to the below-market loan rules are discussed here. Www hnr block com Exception for loans of $10,000 or less. Www hnr block com   The rules for below-market loans do not apply to any day on which the total outstanding amount of loans between the borrower and lender is $10,000 or less. Www hnr block com This exception applies only to: Gift loans between individuals if the gift loan is not directly used to buy or carry income-producing assets, and Pay-related loans or corporation-shareholder loans if the avoidance of federal tax is not a principal purpose of the interest arrangement. Www hnr block com This exception does not apply to a term loan described in (2) earlier that previously has been subject to the below-market loan rules. Www hnr block com Those rules will continue to apply even if the outstanding balance is reduced to $10,000 or less. Www hnr block com Exception for loans to continuing care facilities. Www hnr block com   Loans to qualified continuing care facilities under continuing care contracts are not subject to the rules for below-market loans for the calendar year if the lender or the lender's spouse is age 62 or older at the end of the year. Www hnr block com For the definitions of qualified continuing care facility and continuing care contract, see Internal Revenue Code section 7872(h). Www hnr block com Exception for loans without significant tax effect. Www hnr block com   Loans are excluded from the below-market loan rules if their interest arrangements do not have a significant effect on the federal tax liability of the borrower or the lender. Www hnr block com These loans include: Loans made available by the lender to the general public on the same terms and conditions that are consistent with the lender's customary business practice; Loans subsidized by a federal, state, or municipal government that are made available under a program of general application to the public; Certain employee-relocation loans; Certain loans from a foreign person, unless the interest income would be effectively connected with the conduct of a U. Www hnr block com S. Www hnr block com trade or business and would not be exempt from U. Www hnr block com S. Www hnr block com tax under an income tax treaty; Gift loans to a charitable organization, contributions to which are deductible, if the total outstanding amount of loans between the organization and lender is $250,000 or less at all times during the tax year; and Other loans on which the interest arrangement can be shown to have no significant effect on the federal tax liability of the lender or the borrower. Www hnr block com For a loan described in (6) above, all the facts and circumstances are used to determine if the interest arrangement has a significant effect on the federal tax liability of the lender or borrower. Www hnr block com Some factors to be considered are: Whether items of income and deduction generated by the loan offset each other; The amount of these items; The cost to you of complying with the below-market loan rules, if they were to apply; and Any reasons other than taxes for structuring the transaction as a below-market loan. Www hnr block com If you structure a transaction to meet this exception and one of the principal purposes of that structure is the avoidance of federal tax, the loan will be considered a tax-avoidance loan, and this exception will not apply. Www hnr block com Limit on forgone interest for gift loans of $100,000 or less. Www hnr block com   For gift loans between individuals, if the outstanding loans between the lender and borrower total $100,000 or less, the forgone interest to be included in income by the lender and deducted by the borrower is limited to the amount of the borrower's net investment income for the year. Www hnr block com If the borrower's net investment income is $1,000 or less, it is treated as zero. Www hnr block com This limit does not apply to a loan if the avoidance of federal tax is one of the main purposes of the interest arrangement. Www hnr block com Effective dates. Www hnr block com    These rules apply to term loans made after June 6, 1984, and to demand loans outstanding after that date. Www hnr block com U. Www hnr block com S. Www hnr block com Savings Bonds This section provides tax information on U. Www hnr block com S. Www hnr block com savings bonds. Www hnr block com It explains how to report the interest income on these bonds and how to treat transfers of these bonds. Www hnr block com U. Www hnr block com S. Www hnr block com savings bonds currently offered to individuals include Series EE bonds and Series I bonds. Www hnr block com For other information on U. Www hnr block com S. Www hnr block com savings bonds, write to:  For Series HH/H: Bureau of the Fiscal Service Division of Customer Assistance P. Www hnr block com O. Www hnr block com Box 2186 Parkersburg, WV 26106-2186  For Series EE and I paper savings bonds: Bureau of the Fiscal Service Division of Customer Assistance P. Www hnr block com O. Www hnr block com Box 7012 Parkersburg, WV 26106-7012  For Series EE and I electronic bonds: Bureau of the Fiscal Service  Division of Customer Assistance P. Www hnr block com O. Www hnr block com Box 7015 Parkersburg, WV 26106-7015 Or, on the Internet, visit: www. Www hnr block com treasurydirect. Www hnr block com gov/indiv/indiv. Www hnr block com htm. Www hnr block com Accrual method taxpayers. Www hnr block com   If you use an accrual method of accounting, you must report interest on U. Www hnr block com S. Www hnr block com savings bonds each year as it accrues. Www hnr block com You cannot postpone reporting interest until you receive it or until the bonds mature. Www hnr block com Cash method taxpayers. Www hnr block com   If you use the cash method of accounting, as most individual taxpayers do, you generally report the interest on U. Www hnr block com S. Www hnr block com savings bonds when you receive it. Www hnr block com But see Reporting options for cash method taxpayers , later. Www hnr block com Series HH bonds. Www hnr block com   These bonds were issued at face value. Www hnr block com Interest is paid twice a year by direct deposit to your bank account. Www hnr block com If you are a cash method taxpayer, you must report interest on these bonds as income in the year you receive it. Www hnr block com   Series HH bonds were first offered in 1980 and last offered in August 2004. Www hnr block com Before 1980, series H bonds were issued. Www hnr block com Series H bonds are treated the same as series HH bonds. Www hnr block com If you are a cash method taxpayer, you must report the interest when you receive it. Www hnr block com   Series H bonds have a maturity period of 30 years. Www hnr block com Series HH bonds mature in 20 years. Www hnr block com The last series H bonds matured in 2009. Www hnr block com The last series HH bonds will mature in 2024. Www hnr block com Series EE and series I bonds. Www hnr block com   Interest on these bonds is payable when you redeem the bonds. Www hnr block com The difference between the purchase price and the redemption value is taxable interest. Www hnr block com Series EE bonds. Www hnr block com   Series EE bonds were first offered in January 1980 and have a maturity period of 30 years. Www hnr block com Before July 1980, series E bonds were issued. Www hnr block com The original 10-year maturity period of series E bonds has been extended to 40 years for bonds issued before December 1965 and 30 years for bonds issued after November 1965. Www hnr block com Paper series EE and series E bonds are issued at a discount. Www hnr block com The face value is payable to you at maturity. Www hnr block com Electronic series EE bonds are issued at their face value. Www hnr block com The face value plus accrued interest is payable to you at maturity. Www hnr block com As of January 1, 2012, paper savings bonds were no longer sold at financial institutions. Www hnr block com    Owners of paper series EE bonds can convert them to electronic bonds. Www hnr block com These converted bonds do not retain the denomination listed on the paper certificate but are posted at their purchase price (with accrued interest). Www hnr block com Series I bonds. Www hnr block com   Series I bonds were first offered in 1998. Www hnr block com These are inflation-indexed bonds issued at their face amount with a maturity period of 30 years. Www hnr block com The face value plus all accrued interest is payable to you at maturity. Www hnr block com Reporting options for cash method taxpayers. Www hnr block com   If you use the cash method of reporting income, you can report the interest on series EE, series E, and series I bonds in either of the following ways. Www hnr block com Method 1. Www hnr block com Postpone reporting the interest until the earlier of the year you cash or dispose of the bonds or the year in which they mature. Www hnr block com (However, see Savings bonds traded , later. Www hnr block com )  Note. Www hnr block com Series EE bonds issued in 1983 matured in 2013. Www hnr block com If you have used method 1, you generally must report the interest on these bonds on your 2013 return. Www hnr block com The last series E bonds were issued in 1980 and matured in 2010. Www hnr block com If you used method 1, you generally should have reported the interest on these bonds on your 2010 return. Www hnr block com Method 2. Www hnr block com Choose to report the increase in redemption value as interest each year. Www hnr block com  You must use the same method for all series EE, series E, and series I bonds you own. Www hnr block com If you do not choose method 2 by reporting the increase in redemption value as interest each year, you must use method 1. Www hnr block com If you plan to cash your bonds in the same year you will pay for higher educational expenses, you may want to use method 1 because you may be able to exclude the interest from your income. Www hnr block com To learn how, see Education Savings Bond Program, later. Www hnr block com Change from method 1. Www hnr block com   If you want to change your method of reporting the interest from method 1 to method 2, you can do so without permission from the IRS. Www hnr block com In the year of change, you must report all interest accrued to date and not previously reported for all your bonds. Www hnr block com   Once you choose to report the interest each year, you must continue to do so for all series EE, series E, and series I bonds you own and for any you get later, unless you request permission to change, as explained next. Www hnr block com Change from method 2. Www hnr block com   To change from method 2 to method 1, you must request permission from the IRS. Www hnr block com Permission for the change is automatically granted if you send the IRS a statement that meets all the following requirements. Www hnr block com You have typed or printed the following number at the top: “131. Www hnr block com ” It includes your name and social security number under “131. Www hnr block com ” It includes the year of change (both the beginning and ending dates). Www hnr block com It identifies the savings bonds for which you are requesting this change. Www hnr block com It includes your agreement to: Report all interest on any bonds acquired during or after the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest; and Report all interest on the bonds acquired before the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest, with the exception of the interest reported in prior tax years. Www hnr block com   You must attach this statement to your tax return for the year of change, which you must file by the due date (including extensions). Www hnr block com   You can have an automatic extension of 6 months from the due date of your return for the year of change (excluding extensions) to file the statement with an amended return. Www hnr block com On the statement, type or print “Filed pursuant to section 301. Www hnr block com 9100-2. Www hnr block com ” To get this extension, you must have filed your original return for the year of the change by the due date (including extensions). Www hnr block com    By the date you file the original statement with your return, you must also send a signed copy to the address below. Www hnr block com    Internal Revenue Service Attention: CC:IT&A (Automatic Rulings Branch) P. Www hnr block com O. Www hnr block com Box 7604 Benjamin Franklin Station Washington, DC 20044   If you use a private delivery service, send the signed copy to the address below. Www hnr block com Internal Revenue Service Attention: CC:IT&A  (Automatic Rulings Branch) Room 5336 1111 Constitution Avenue, NW Washington, DC 20224    Instead of filing this statement, you can request permission to change from method 2 to method 1 by filing Form 3115. Www hnr block com In that case, follow the form instructions for an automatic change. Www hnr block com No user fee is required. Www hnr block com Co-owners. Www hnr block com   If a U. Www hnr block com S. Www hnr block com savings bond is issued in the names of co-owners, such as you and your child or you and your spouse, interest on the bond is generally taxable to the co-owner who bought the bond. Www hnr block com One co-owner's funds used. Www hnr block com   If you used your funds to buy the bond, you must pay the tax on the interest. Www hnr block com This is true even if you let the other co-owner redeem the bond and keep all the proceeds. Www hnr block com Under these circumstances, the co-owner who redeemed the bond will receive a Form 1099-INT at the time of redemption and must provide you with another Form 1099-INT showing the amount of interest from the bond taxable to you. Www hnr block com The co-owner who redeemed the bond is a “nominee. Www hnr block com ” See Nominee distributions under How To Report Interest Income, later, for more information about how a person who is a nominee reports interest income belonging to another person. Www hnr block com Both co-owners' funds used. Www hnr block com   If you and the other co-owner each contribute part of the bond's purchase price, the interest is generally taxable to each of you, in proportion to the amount each of you paid. Www hnr block com Community property. Www hnr block com   If you and your spouse live in a community property state and hold bonds as community property, one-half of the interest is considered received by each of you. Www hnr block com If you file separate returns, each of you generally must report one-half of the bond interest. Www hnr block com For more information about community property, see Publication 555. Www hnr block com Table 1-2. Www hnr block com   These rules are also shown in Table 1-2. Www hnr block com Child as only owner. Www hnr block com   Interest on U. Www hnr block com S. Www hnr block com savings bonds bought for and registered only in the name of your child is income to your child, even if you paid for the bonds and are named as beneficiary. Www hnr block com If the bonds are series EE, series E, or series I bonds, the interest on the bonds is income to your child in the earlier of the year the bonds are cashed or disposed of or the year the bonds mature, unless your child chooses to report the interest income each year. Www hnr block com Choice to report interest each year. Www hnr block com   The choice to report the accrued interest each year can be made either by your child or by you for your child. Www hnr block com This choice is made by filing an income tax return that shows all the interest earned to date, and by stating on the return that your child chooses to report the interest each year. Www hnr block com Either you or your child should keep a copy of this return. Www hnr block com   Unless your child is otherwise required to file a tax return for any year after making this choice, your child does not have to file a return only to report the annual accrual of U. Www hnr block com S. Www hnr block com savings bond interest under this choice. Www hnr block com However, see Tax on unearned income of certain children , earlier, under General Information. Www hnr block com Neither you nor your child can change the way you report the interest unless you request permission from the IRS, as discussed earlier under Change from method 2 . Www hnr block com Ownership transferred. Www hnr block com   If you bought series E, series EE, or series I bonds entirely with your own funds and had them reissued in your co-owner's name or beneficiary's name alone, you must include in your gross income for the year of reissue all interest that you earned on these bonds and have not previously reported. Www hnr block com But, if the bonds were reissued in your name alone, you do not have to report the interest accrued at that time. Www hnr block com   This same rule applies when bonds (other than bonds held as community property) are transferred between spouses or incident to divorce. Www hnr block com Example. Www hnr block com You bought series EE bonds entirely with your own funds. Www hnr block com You did not choose to report the accrued interest each year. Www hnr block com Later, you transfer the bonds to your former spouse under a divorce agreement. Www hnr block com You must include the deferred accrued interest, from the date of the original issue of the bonds to the date of transfer, in your income in the year of transfer. Www hnr block com Your former spouse includes in income the interest on the bonds from the date of transfer to the date of redemption. Www hnr block com Table 1-2. Www hnr block com Who Pays the Tax on U. Www hnr block com S. Www hnr block com Savings Bond Interest IF . Www hnr block com . Www hnr block com . Www hnr block com THEN the interest must be reported by . Www hnr block com . Www hnr block com . Www hnr block com you buy a bond in your name and the name of another person as co-owners, using only your own funds you. Www hnr block com you buy a bond in the name of another person, who is the sole owner of the bond the person for whom you bought the bond. Www hnr block com you and another person buy a bond as co-owners, each contributing part of the purchase price both you and the other co-owner, in proportion to the amount each paid for the bond. Www hnr block com you and your spouse, who live in a community property state, buy a bond that is community property you and your spouse. Www hnr block com If you file separate returns, both you and your spouse generally report one-half of the interest. Www hnr block com Purchased jointly. Www hnr block com   If you and a co-owner each contributed funds to buy series E, series EE, or series I bonds jointly and later have the bonds reissued in the co-owner's name alone, you must include in your gross income for the year of reissue your share of all the interest earned on the bonds that you have not previously reported. Www hnr block com The former co-owner does not have to include in gross income at the time of reissue his or her share of the interest earned that was not reported before the transfer. Www hnr block com This interest, however, as well as all interest earned after the reissue, is income to the former co-owner. Www hnr block com   This income-reporting rule also applies when the bonds are reissued in the name of your former co-owner and a new co-owner. Www hnr block com But the new co-owner will report only his or her share of the interest earned after the transfer. Www hnr block com   If bonds that you and a co-owner bought jointly are reissued to each of you separately in the same proportion as your contribution to the purchase price, neither you nor your co-owner has to report at that time the interest earned before the bonds were reissued. Www hnr block com Example 1. Www hnr block com You and your spouse each spent an equal amount to buy a $1,000 series EE savings bond. Www hnr block com The bond was issued to you and your spouse as co-owners. Www hnr block com You both postpone reporting interest on the bond. Www hnr block com You later have the bond reissued as two $500 bonds, one in your name and one in your spouse's name. Www hnr block com At that time neither you nor your spouse has to report the interest earned to the date of reissue. Www hnr block com Example 2. Www hnr block com You bought a $1,000 series EE savings bond entirely with your own funds. Www hnr block com The bond was issued to you and your spouse as co-owners. Www hnr block com You both postponed reporting interest on the bond. Www hnr block com You later have the bond reissued as two $500 bonds, one in your name and one in your spouse's name. Www hnr block com You must report half the interest earned to the date of reissue. Www hnr block com Transfer to a trust. Www hnr block com   If you own series E, series EE, or series I bonds and transfer them to a trust, giving up all rights of ownership, you must include in your income for that year the interest earned to the date of transfer if you have not already reported it. Www hnr block com However, if you are considered the owner of the trust and if the increase in value both before and after the transfer continues to be taxable to you, you can continue to defer reporting the interest earned each year. Www hnr block com You must include the total interest in your income in the year you cash or dispose of the bonds or the year the bonds finally mature, whichever is earlier. Www hnr block com   The same rules apply to previously unreported interest on series EE or series E bonds if the transfer to a trust consisted of series HH or series H bonds you acquired in a trade for the series EE or series E bonds. Www hnr block com See Savings bonds traded , later. Www hnr block com Decedents. Www hnr block com   The manner of reporting interest income on series E, series EE, or series I bonds, after the death of the owner (decedent), depends on the accounting and income-reporting methods previously used by the decedent. Www hnr block com Decedent who reported interest each year. Www hnr block com   If the bonds transferred because of death were owned by a person who used an accrual method, or who used the cash method and had chosen to report the interest each year, the interest earned in the year of death up to the date of death must be reported on that person's final return. Www hnr block com The person who acquires the bonds includes in income only interest earned after the date of death. Www hnr block com Decedent who postponed reporting interest. Www hnr block com   If the transferred bonds were owned by a decedent who had used the cash method and had not chosen to report the interest each year, and who had bought the bonds entirely with his or her own funds, all interest earned before death must be reported in one of the following ways. Www hnr block com The surviving spouse or personal representative (executor, administrator, etc. Www hnr block com ) who files the final income tax return of the decedent can choose to include on that return all interest earned on the bonds before the decedent's death. Www hnr block com The person who acquires the bonds then includes in income only interest earned after the date of death. Www hnr block com If the choice in (1) is not made, the interest earned up to the date of death is income in respect of the decedent and should not be included in the decedent's final return. Www hnr block com All interest earned both before and after the decedent's death (except any part reported by the estate on its income tax return) is income to the person who acquires the bonds. Www hnr block com If that person uses the cash method and does not choose to report the interest each year, he or she can postpone reporting it until the year the bonds are cashed or disposed of or the year they mature, whichever is earlier. Www hnr block com In the year that person reports the interest, he or she can claim a deduction for any federal estate tax paid on the part of the interest included in the decedent's estate. Www hnr block com For more information on income in respect of a decedent, see Publication 559, Survivors, Executors, and Administrators. Www hnr block com Example 1. Www hnr block com Your uncle, a cash method taxpayer, died and left you a $1,000 series EE bond. Www hnr block com He had bought the bond for $500 and had not chosen to report the interest each year. Www hnr block com At the date of death, interest of $200 had accrued on the bond, and its value of $700 was included in your uncle's estate. Www hnr block com Your uncle's executor chose not to include the $200 accrued interest in your uncle's final income tax return. Www hnr block com The $200 is income in respect of the decedent. Www hnr block com You are a cash method taxpayer and do not choose to report the interest each year as it is earned. Www hnr block com If you cash the bond when it reaches maturity value of $1,000, you report $500 interest income—the difference between maturity value of $1,000 and the original cost of $500. Www hnr block com For that year, you can deduct (as a miscellaneous itemized deduction not subject to the 2%-of-adjusted-gross-income limit) any federal estate tax paid because the $200 interest was included in your uncle's estate. Www hnr block com Example 2. Www hnr block com If, in Example 1 , the executor had chosen to include the $200 accrued interest in your uncle's final return, you would report only $300 as interest when you cashed the bond at maturity. Www hnr block com $300 is the interest earned after your uncle's death. Www hnr block com Example 3. Www hnr block com If, in Example 1 , you make or have made the choice to report the increase in redemption value as interest each year, you include in gross income for the year you acquire the bond all of the unreported increase in value of all series E, series EE, and series I bonds you hold, including the $200 on the bond you inherited from your uncle. Www hnr block com Example 4. Www hnr block com When your aunt died, she owned series HH bonds that she had acquired in a trade for series EE bonds. Www hnr block com You were the beneficiary of these bonds. Www hnr block com Your aunt used the cash method and did not choose to report the interest on the series EE bonds each year as it accrued. Www hnr block com Your aunt's executor chose not to include any interest earned before your aunt's death on her final return. Www hnr block com The income in respect of the decedent is the sum of the unreported interest on the series EE bonds and the interest, if any, payable on the series HH bonds but not received as of the date of your aunt's death. Www hnr block com You must report any interest received during the year as income on your return. Www hnr block com The part of the interest payable but not received before your aunt's death is income in respect of the decedent and may qualify for the estate tax deduction. Www hnr block com For information on when to report the interest on the series EE bonds traded, see Savings bonds traded , later. Www hnr block com Savings bonds distributed from a retirement or profit-sharing plan. Www hnr block com   If you acquire a U. Www hnr block com S. Www hnr block com savings bond in a taxable distribution from a retirement or profit-sharing plan, your income for the year of distribution includes the bond's redemption value (its cost plus the interest accrued before the distribution). Www hnr block com When you redeem the bond (whether in the year of distribution or later), your interest income includes only the interest accrued after the bond was distributed. Www hnr block com To figure the interest reported as a taxable distribution and your interest income when you redeem the bond, see Worksheet for savings bonds distributed from a retirement or profit-sharing plan under How To Report Interest Income, later. Www hnr block com Savings bonds traded. Www hnr block com   If you postponed reporting the interest on your series EE or series E bonds, you did not recognize taxable income when you traded the bonds for series HH or series H bonds, unless you received cash in the trade. Www hnr block com (You cannot trade series I bonds for series HH bonds. Www hnr block com After August 31, 2004, you cannot trade any other series of bonds for series HH bonds. Www hnr block com ) Any cash you received is income up to the amount of the interest earned on the bonds traded. Www hnr block com When your series HH or series H bonds mature, or if you dispose of them before maturity, you report as interest the difference between their redemption value and your cost. Www hnr block com Your cost is the sum of the amount you paid for the traded series EE or series E bonds plus any amount you had to pay at the time of the trade. Www hnr block com Example. Www hnr block com You traded series EE bonds (on which you postponed reporting the interest) for $2,500 in series HH bonds and $223 in cash. Www hnr block com You reported the $223 as taxable income on your tax return. Www hnr block com At the time of the trade, the series EE bonds had accrued interest of $523 and a redemption value of $2,723. Www hnr block com You hold the series HH bonds until maturity, when you receive $2,500. Www hnr block com You must report $300 as interest income in the year of maturity. Www hnr block com This is the difference between their redemption value, $2,500, and your cost, $2,200 (the amount you paid for the series EE bonds). Www hnr block com (It is also the difference between the accrued interest of $523 on the series EE bonds and the $223 cash received on the trade. Www hnr block com ) Choice to report interest in year of trade. Www hnr block com   You could have chosen to treat all of the previously unreported accrued interest on series EE or series E bonds traded for series HH bonds as income in the year of the trade. Www hnr block com If you made this choice, it is treated as a change from method 1. Www hnr block com See Change from method 1 under Series EE and series I bonds, earlier. Www hnr block com Form 1099-INT for U. Www hnr block com S. Www hnr block com savings bond interest. Www hnr block com   When you cash a bond, the bank or other payer that redeems it must give you a Form 1099-INT if the interest part of the payment you receive is $10 or more. Www hnr block com Box 3 of your Form 1099-INT should show the interest as the difference between the amount you received and the amount paid for the bond. Www hnr block com However, your Form 1099-INT may show more interest than you have to include on your income tax return. Www hnr block com For example, this may happen if any of the following are true. Www hnr block com You chose to report the increase in the redemption value of the bond each year. Www hnr block com The interest shown on your Form 1099-INT will not be reduced by amounts previously included in income. Www hnr block com You received the bond from a decedent. Www hnr block com The interest shown on your Form 1099-INT will not be reduced by any interest reported by the decedent before death, or on the decedent's final return, or by the estate on the estate's income tax return. Www hnr block com Ownership of the bond was transferred. Www hnr block com The interest shown on your Form 1099-INT will not be reduced by interest that accrued before the transfer. Www hnr block com You were named as a co-owner, and the other co-owner contributed funds to buy the bond. Www hnr block com The interest shown on your Form 1099-INT will not be reduced by the amount you received as nominee for the other co-owner. Www hnr block com (See Co-owners , earlier in this section, for more information about the reporting requirements. Www hnr block com ) You received the bond in a taxable distribution from a retirement or profit-sharing plan. Www hnr block com The interest shown on your Form 1099-INT will not be reduced by the interest portion of the amount taxable as a distribution from the plan and not taxable as interest. Www hnr block com (This amount is generally shown on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Www hnr block com , for the year of distribution. Www hnr block com )   For more information on including the correct amount of interest on your return, see U. Www hnr block com S. Www hnr block com savings bond interest previously reported or Nominee distributions under How To Report Interest Income, later. Www hnr block com    Interest on U. Www hnr block com S. Www hnr block com savings bonds is exempt from state and local taxes. Www hnr block com The Form 1099-INT you receive will indicate the amount that is for U. Www hnr block com S. Www hnr block com savings bonds interest in box 3. Www hnr block com Do not include this income on your state or local income tax return. Www hnr block com Education Savings Bond Program You may be able to exclude from income all or part of the interest you receive on the redemption of qualified U. Www hnr block com S. Www hnr block com savings bonds during the year if you pay qualified higher educational expenses during the same year. Www hnr block com This exclusion is known as the Education Savings Bond Program. Www hnr block com You do not qualify for this exclusion if your filing status is married filing separately. Www hnr block com Form 8815. Www hnr block com   Use Form 8815 to figure your exclusion. Www hnr block com Attach the form to your Form 1040 or Form 1040A. Www hnr block com Qualified U. Www hnr block com S. Www hnr block com savings bonds. Www hnr block com   A qualified U. Www hnr block com S. Www hnr block com savings bond is a series EE bond issued after 1989 or a series I bond. Www hnr block com The bond must be issued either in your name (sole owner) or in your and your spouse's names (co-owners). Www hnr block com You must be at least 24 years old before the bond's issue date. Www hnr block com For example, a bond bought by a parent and issued in the name of his or her child under age 24 does not qualify for the exclusion by the parent or child. Www hnr block com    The issue date of a bond may be earlier than the date the bond is purchased because the issue date assigned to a bond is the first day of the month in which it is purchased. Www hnr block com Beneficiary. Www hnr block com   You can designate any individual (including a child) as a beneficiary of the bond. Www hnr block com Verification by IRS. Www hnr block com   If you claim the exclusion, the IRS will check it by using bond redemption information from the Department of Treasury. Www hnr block com Qualified expenses. Www hnr block com   Qualified higher educational expenses are tuition and fees required for you, your spouse, or your dependent (for whom you claim an exemption) to attend an eligible educational institution. Www hnr block com   Qualified expenses include any contribution you make to a qualified tuition program or to a Coverdell education savings account. Www hnr block com For information about these programs, see Publication 970, Tax Benefits for Education. Www hnr block com   Qualified expenses do not include expenses for room and board or for courses involving sports, games, or hobbies that are not part of a degree or certificate granting program. Www hnr block com Eligible educational institutions. Www hnr block com   These institutions include most public, private, and nonprofit universities, colleges, and vocational schools that are accredited and eligible to participate in student aid programs run by the Department of Education. Www hnr block com Reduction for certain benefits. Www hnr block com   You must reduce your qualified higher educational expenses by all of the following tax-free benefits. Www hnr block com Tax-free part of scholarships and fellowships. Www hnr block com Expenses used to figure the tax-free portion of distributions from a Coverdell ESA. Www hnr block com Expenses used to figure the tax-free portion of distributions from a qualified tuition program. Www hnr block com Any tax-free payments (other than gifts or inheritances) received as educational assistance, such as: Veterans' educational assistance benefits, Qualified tuition reductions, or Employer-provided educational assistance. Www hnr block com Any expense used in figuring the American Opportunity and lifetime learning credits. Www hnr block com For information about these benefits, see Publication 970. Www hnr block com Amount excludable. Www hnr block com   If the total proceeds (interest and principal) from the qualified U. Www hnr block com S. Www hnr block com savings bonds you redeem during the year are not more than your adjusted qualified higher educational expenses for the year, you may be able to exclude all of the interest. Www hnr block com If the proceeds are more than the expenses, you may be able to exclude only part of the interest. Www hnr block com   To determine the excludable amount, multiply the interest part of the proceeds by a fraction. Www hnr block com The numer
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The Www Hnr Block Com

Www hnr block com There are three ways you can request an automatic extension of time to file a U.S. individual income tax return: (1) you can electronically file Form 4868 (PDF), Application For Automatic Extension of Time To File U.S. Individual Tax Return; (2) you can pay all or part of your estimated income tax due using a credit or debit card or by using the Electronic Federal Tax Payment System (EFTPS); or (3) you can file a paper Form 4868 by mail. Www hnr block com Www hnr block com If you file your Form 4868 electronically you will receive an acknowledgement or confirmation number for your records and you do not need to mail in Form 4868. If you need to pay additional taxes when filing Form 4868 electronically, you may do so through the outside service provider or through e-file. You can refer to your tax software or tax professional for ways to file electronically using e-file services. Several companies offer free filing of Form 4868 through the Free File program that you can access on the IRS.gov website. If you wish to file electronically, be sure to have a copy of last year's tax return. You will be asked to provide the adjusted gross income (AGI) from the return for taxpayer verification. Www hnr block com Www hnr block com A second way of requesting an automatic extension of time to file your individual income tax return is to pay part or your entire estimated income tax due by credit card or debit card or by using EFTPS. You may pay by phone or Internet through one of the service providers listed on Form 4868. Each service provider will charge a convenience fee based on the amount of the tax payment. At the completion of the transaction, you will receive a confirmation number for your records. Www hnr block com Www hnr block com Finally, you can request an automatic extension of time to file your individual income tax return by completing paper Form 4868 and mailing it to the appropriate address provided on the form. Www hnr block com Www hnr block com Please be aware that an extension of time to file is NOT an extension of time to pay.