CARL WATTS & ASSOCIATES

March 18, 2019

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Schedule B
Interest and Ordinary Dividends
Most types of interest you earn are subject to federal income tax, including interest you earn in a bank savings account or from corporate bonds you invest in.

Ordinary dividends include but are not necessarily limited to:

  • Dividends from tax-exempt organizations;

  • Capital gain;

  • Dividends paid on deposits with banking institutions, such as credit unions;

  • Dividends paid by a corporation on securities held in an employee stock ownership plan (ESOP).

Most interest income and ordinary dividends income is taxable as ordinary income on your federal tax return, and is therefore subject to ordinary income tax rates.

Certain interest you may receive is not taxable income, such as interest on insurance dividends, interest on Series EE and Series I U.S. Savings Bonds, interest on some bonds used to finance government operations and issued by a state, the District of Columbia, or a U.S. possession.

Dividends can be classified as ordinary or qualified. Whereas ordinary dividends are taxable as ordinary income, qualified dividends that meet certain requirements are taxed at the lower capital gain rates of 0, 15 or 20 percent rates.

For more information you can check Publication 550, Investment Income and Expenses. Even if it is still being updated for tax year 2018, this publication provides information on the tax treatment of investment income and expenses, including information for individual shareholders of mutual funds or other regulated investment companies, such as money market funds. It explains:

  • what investment income is taxable and what investment expenses are deductible,

  • when and how to show these items on your tax return,

  • how to determine and report gains and losses on the disposition of investment property, and

  • information on property trades and tax shelters.



The final section of Schedule B is where you must disclose any foreign bank or investment accounts you have and whether you receive distributions from certain foreign trusts.

A financial account includes, but isn't limited to, a securities, brokerage, savings, demand, checking, deposit, time deposit, or other account maintained with a financial institution (or other person performing the services of a financial institution).

A financial account also includes a commodity futures or options account, an insurance policy with a cash value (such as a whole life insurance policy), an annuity policy with a cash value, and shares in a mutual fund or similar pooled fund (meaning a fund that is available to the general public with a regular net asset value determination and regular redemptions).

A financial account is located in a foreign country if the account is physically located outside of the United States. For example, an account maintained with a branch of a United States bank that is physically located outside of the United States is a foreign financial account.

An account maintained with a branch of a foreign bank that is physically located in the United States isn't a foreign financial account.


All in all, reporting income from interest and dividends may not seem very complicated, nevertheless, help from a tax professional is advisable in all your dealings with the IRS, especially after the implementation of important changes in the tax law.
We have been digging into the schedules territory since the beginning of the year, albeit, until now, it was only about the six schedules complementing the new Form 1040.

The famous Tax Cuts and Jobs Act brought many changes to the tax legislation, and the “older” schedules make no exception. The senior schedules include Schedules A, B, C, C-EZ, D, E, EIC, F, H, J, R, SE, and 8812.

Schedule A, Itemized Deductions, has been the focus of many debates, articles, newsletters, and analysis and will not be missing from many of our newsletters to come.

Which is why this time, we shall make a quick examination of Schedule B, Interest and Ordinary Dividends, a topic definitely deserving of your attention.

Schedule B is most often used to identify interest (Part I) and dividend income (Part II), and is also used to report foreign bank or other financial accounts (Part III).


As you can find out from Schedule B instructions, you have to use it if any of the following applies.

  • You had over $1,500 of taxable interest or ordinary dividends.

  • You received interest from a seller-financed mortgage and the buyer used the property as a personal residence.

    If you sold your home or other property and the buyer used the property as a personal residence, list first any interest the buyer paid you on a mortgage or other form of seller financing and be sure to show the buyer’s name, address, and SSN.

  • You have accrued interest from a bond.

    When you buy bonds between interest payment dates and pay accrued interest to the seller, this interest is taxable to the seller.

    If you received a Form 1099 for interest as a purchaser of a bond with accrued interest, follow the rules indicated under Nominees to see how to report the accrued interest. But identify the amount to be subtracted as "Accrued Interest."

  • You are reporting original issue discount (OID) of less than the amount shown on Form 1099-OID.

  • You are reporting interest income of less than the amount shown on a Form 1099 due to amortizable bond premium.

  • You are claiming the exclusion of interest from series EE or I U.S. savings bonds issued after 1989.


  • You received interest or ordinary dividends as a nominee.

    If you received a Form 1099-INT that includes interest you received as a nominee (that is, in your name, but the interest actually belongs to someone else), report the total on line 1. Do this even if you later distributed some or all of this income to others. Under your last entry on line 1, you are instruct4d to put a subtotal of all interest listed on line 1. Below this subtotal, enter "Nominee Distribution" and show the total interest you received as a nominee. Subtract this amount from the subtotal and enter the result on line 2.

  • You had a financial interest in, or signature authority over, a financial account in a foreign country or you received a distribution from, or were a grantor of, or transferor to, a foreign trust.

You are required to provide the name of each payer (such as an investment firm or bank) and the amount of interest and/or dividends received from each payer.

The information you must report on Schedule B is typically reported to the IRS by the payer, with a copy sent to you, using form 1099-INT for interest and form 1099-DIV for dividends. You must report the interest and dividends you receive to the IRS because these sources of income are taxable.

If the amount you earned did not exceed $1,500 (excluding foreign accounts), you don’t need to file Schedule B to list it. Instead, you list such interest and dividend income on your Form 1040, Schedule 1, Additional Income and Adjustments to Income, and add it to all your other taxable income.


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