Gross Income

Record-keeping Requirements

Keep the following to verify the amount of interest you excluded.

• Bill, receipts, canceled checks, or other documents showing you paid qualified higher education expenses in 1999.
• A written record of each post-1989 series EE or I bond that you cash. Your record must include the serial number, issued date, face exceeds these levels. It also isn't available for taxpayers using the married filing separately status. 

MODIFIED ADJUSTED GROSS INCOME

Modified adjusted gross income is an employee's adjusted gross income for a tax year, plus any tax exempt interest they have earned.The taxpayer's adjusted gross income, and is then modified for each individual purpose.

MAGI, for purposes of the U.S. Savings Bonds exclusion, is usually computed in the same manner as the regular AGI. However, the amount of interest included in MAGI is the amount before any qualified bond exclusion has been subtracted. Any student loan interest deduction shown Form 1040, must be added back, and any employer-provided adoption benefits which were excluded from income must be added in. Also, certain taxpayers must add back the foreign earned income exclusion, the foreign housing exclusion or deduction, the exclusion for income from certain U.S. possessions, and the exclusion for income from sources within Puerto Rico.

Other Interest Income

Municipal bonds are generally issued by state and local government to fund capital improvement projects. Local government include countries, cities, school district, and other administrative divisions of the states that have been granted the authority to issue bonds. The federal government does not tax municipal bond interest.

Some state and local governments do not tax interest from any municipal bonds. Others tax interest from municipal bonds issued by state or local governments other than their own. Other states tax interest from all municipal bonds, including their own.

Tax-exempt interest is reported on Forms 1040A and 1040, but must be kept separate from taxable interest so it is not included in taxable income. Tax-exempt interest is reported on line 8b, Form 1040A or Form 1040.

If the taxpayer received a Form 1099-INT for ta-exempt interest, include the tax-exempt interest with other interest items.

Interest Penalty on Early Withdrawal of Savings

If money in a time savings (such as a certificate of deposit) is withdrawn before maturity, interest may revert to a lower rate for the year of withdrawal and there may also be a period when no interest is paid. The difference (the amount of interest forfeited) will be reported as an early withdrawal penalty in Box 2 on Form 1099-INT or similar statement. It's possible that the penalty could be more than the gross amount of interest reported in Box 1.

The interest penalty is entered on line 30, Form 1040, ans is subtracted from total income. Form 1040A cannot be used. The interest reported on Form 1099-INT is the amount that was received for the tax year up to the date of withdrawal.

Form 1099-INT-Interest Income

RECIPIENTS identification number is the social security number of the owner of the account.

Box 1. This box includes amounts that are paid or credited to the taxpayer's account by savings and loan associations, building and loan associations, cooperative banks, homestead associations, credit unions, and similar organizations.

It includes interest on bank deposits, corporate bonds, debentures, notes, certificate, stockholder's accounts, and any interest paid in the course of trade or business totaling $600 or more to any one individual.

Box 2. The early withdrawal penalty is the interest penalty due to an early withdrawal of time deposits. It is entered on line 30, Form 1040. It does not affect the entry of interest income from Box 1.

Box 3. Interest from U.S. Savings Bonds and Treasury obligations is entered here Generally, this income is taxable on the federal return, but nontaxable on state returns. Box-3 amounts are entered on the federal return in the same manner as Box-1 amounts.

Box 4. Usually, tax isn't withheld from interest payments. However, if the taxpayer has failed to provide the payer with this social security or other identifying number, the payer is required to withhold 31 percent of the interest paid. Any amount withheld is entered in Box 4.

Box 5. Any amount shown in this box is the taxpayer's share of investment expenses from a real estate mortgage investment conduit (REMIC). A REMIC is a corporation similar to a mutual fund that invests in mortgage. If the taxpayer itemizes, he may deduct this amount as an itemized deduction.

Box 6. Foreign tax paid is any foreign tax withheld from the interest income. The taxpayer mat take a dollar-for-dollar credit for this tax, or deduct it from his taxable income as an itemized deduction.

Box 7. Foreign country or U.S. possession is the country or possession to which  the foreign tax was paid.

DIVIDENDS

Dividends are paid to shareholders (people who own stock) of corporations. They represent the shareholder's portion of the corporation's profits. In this section you'll learn about the various kinds of dividends shareholder may receive, and their tax treatment. 

Note: Certain distributions commonly referred to as dividends are actually interest. These so-called "dividends" must be reported as interest. The most common example is "dividends" paid by credit unions.

Payers of dividends of $10 or more to any one person during the year required to report such payments to the IRS and furnish the recipient with a statement of total dividends receives for the tax year. Form 1099-DIV

The three most common types of distributions are:

1. Ordinary dividends (Box 1);
2. Capital gain distributions (Box 2a); and
3. Nontaxable distributions (Box 3).

Ordinary dividends are the most common type of distribution and are the portion of a corporation's profits paid to the shareholders. Ordinary dividends are fully taxable. 

Capital gain distributions are paid by mutual funds, regulated investment companies, and real estate investment trusts. They represent the shareholder's portion of gain from the sale of securities owned by these investment companies. There are two treatments of capital gain distributions. Both types of capital gain distributions are taxable for the year constructively received.

• Distributed capital gains are paid in cash to the shareholders or reinvested in additional shares at the shareholders' request.
• Undistributed capital gains are retained by the investment company, which pays the tax on them. These gains are reinvested automatically in additional shares and reported to the taxpayer of Form 2439 rather than on Form 1099-DIV. An individual who receives Form 2439 may have a credit to be entered on line 63, Form 1040, for tax paid by the investment company.

Nontaxable distributions are a return of the shareholder's capital (original investment), generally made because an excess amount of capital has been accumulated by the corporation. Nontaxable distributions may be received in cash or reinvested at the shareholder's request to acquire additional shares. The basis (usually the cost) of the stock must be reduced by the amount of the distribution. Amounts received are not taxable until the remaining basis is reduced to zero.