Interest and dividends: 1099-INT and 1099-DIV

Interest and dividends look alike on a bank statement and are taxed very differently on a return. Interest is ordinary income at your regular rates, while a large part of a typical dividend gets the lower capital-gains rates instead.

Interest: the 1099-INT

Box 1 is ordinary interest — savings accounts, certificates of deposit, money market accounts, notes people owe you. It is taxed at your regular rate, the same as wages, with no preferential treatment for having held the account a long time.

A few other boxes change the answer:

• Box 3 is interest on U.S. savings bonds and Treasury obligations. It is federally taxable, but states generally cannot tax it, which matters when you live somewhere with an income tax.
• Box 4 is federal income tax withheld. That happens mainly under backup withholding, and it counts as a payment on your return the way withholding from a paycheck does.
• Box 8 is tax-exempt interest, usually municipal bonds. You still report it, even though it is not taxed, because other calculations look at it.

Interest is taxable when it is credited to you, not when you take it out. A certificate of deposit that rolls over produces income in the year it is credited even though you never touched the money.

Dividends: the 1099-DIV

Box 1a is total ordinary dividends. Box 1b is the qualified subset, and box 1b is always part of box 1a, never in addition to it.

Qualified dividends are taxed at capital-gains rates instead of ordinary rates. The lowest of those rates is zero: qualified dividends and long-term gains are taxed at nothing while your taxable income stays at or below $48,350 on a single return or $96,700 on a joint one. Above that, the rate steps up rather than applying to everything at once, in the same way brackets work.

To be qualified, a dividend has to be paid by a qualifying corporation and you have to have held the stock across a holding period the fund or broker tracks for you. That is why box 1b can be smaller than you expected on a fund you bought late in the year.

Capital gain distributions, box 2a

Box 2a is a capital gain distribution: your share of gains a mutual fund or exchange-traded fund realized inside the fund and passed through. It counts as a long-term gain no matter how long you have owned the shares, so it gets the same rates as qualified dividends.

Two consequences catch people out. You can owe tax on a fund that lost value over the year, because the fund sold appreciated holdings inside itself. And a distribution reinvested automatically is still taxable, and it also raises your cost basis for later, which is worth recording while you can still see the confirmation.

When Schedule B is required

Small amounts of interest and dividends go straight onto the face of the return. Once your total interest or your total ordinary dividends rises above a threshold the form instructions set, Schedule B is required and lists each payer by name.

Schedule B carries a second job. Part III asks whether you had an interest in or signature authority over a foreign financial account, or received a distribution from a foreign trust. Those questions must be answered even when the interest itself is small, and answering yes can bring separate reporting of its own.

Foreign tax paid

Box 6 on the 1099-INT and box 7 on the 1099-DIV report foreign tax a fund or bank already paid out of your money, usually on international holdings. You do not lose it. You can claim it as a foreign tax credit, which is a dollar-for-dollar reduction of your U.S. tax, or take it as an itemized deduction, which is usually worth less.

The credit ordinarily runs through Form 1116. There is an election that lets a taxpayer with a small amount of foreign tax, all of it reported on these information returns and all of it passive, claim the credit directly without filing Form 1116. The instructions set the limit and the conditions, and the election is worth asking about, because filing Form 1116 for a very small credit is a lot of work for a small result.

The net investment income tax

Above $200,000 of modified adjusted gross income on a single return, or $250,000 on a joint one, an additional tax applies on Form 8960. It is not charged on all of your investment income: the tax falls on the smaller of your net investment income or the amount by which your modified adjusted gross income exceeds the threshold. So a household just over the line pays it on very little.

Interest, dividends and capital gains are all in scope; wages and self-employment income are not, although they raise the income that decides whether the threshold is crossed.

Keep every 1099-INT and 1099-DIV, including the ones showing small amounts. The IRS receives copies of all of them, and a missing form is one of the most common reasons a straightforward return draws a notice a year later.