Schedule B (Form 1040): Interest and Ordinary Dividends
If you earn interest income or ordinary dividends during the year, you must report this income on your Form 1040. To do so, you will use Schedule B (Form 1040), which is specifically designed to help taxpayers track and report these types of income. Whether you have a savings account, bonds, or investments that generate interest or dividends, Schedule B ensures that this income is properly accounted for on your tax return.
In this guide, we will take a deep dive into Schedule B, explain what types of income need to be reported, and offer helpful tips on how to fill it out accurately.
What is Schedule B (Form 1040)?
Schedule B (Form 1040) is used to report interest income and ordinary dividends that you have earned throughout the year. These types of income are generally taxable, and you are required to disclose them to the IRS. Schedule B is used to provide additional details about this income, especially if you receive over $1,500 in interest or dividends, or if you have foreign accounts or foreign financial assets.
For most taxpayers with smaller amounts of interest or dividend income, Schedule B is a necessary part of the filing process. However, if you do not meet these thresholds, you may not need to use Schedule B, though you will still report your interest and dividends directly on your Form 1040.
When Do You Need to File Schedule B?
You must use Schedule B if:
- You have over $1,500 in interest income or ordinary dividends.
- You have foreign accounts or foreign financial assets that must be disclosed.
- You received interest income or ordinary dividends from savings accounts, bonds, mutual funds, stocks, or any other income-generating financial products.
Even if you do not meet the $1,500 threshold, you may still need to file Schedule B if you have foreign bank accounts or other reporting obligations under the Foreign Account Tax Compliance Act (FATCA).
What Types of Income Should Be Reported on Schedule B?
Schedule B is specifically for reporting interest income and ordinary dividends. Let’s break down the two main categories:
1. Interest Income
Interest income is the money you earn from lending your money to financial institutions, such as banks, credit unions, or other entities. Common sources of interest income include:
- Savings accounts
- Certificates of deposit (CDs)
- Bonds (corporate or government)
- Money market accounts
- Interest from loans or notes you hold
When you receive interest income, it is generally taxable and must be reported on your tax return. Form 1099-INT, which you receive from the bank or financial institution, will show the amount of interest you earned during the year.
2. Ordinary Dividends
Dividends are the portion of a company’s earnings that is distributed to shareholders. If you own stocks, mutual funds, or other investment products, you may receive dividends. Ordinary dividends are taxed as ordinary income and must be reported on Schedule B. Examples of dividend-paying investments include:
- Stocks
- Mutual funds
- Exchange-traded funds (ETFs)
- Real estate investment trusts (REITs)
The 1099-DIV form will report the dividends you earned, including the total amount of ordinary dividends you need to report. You will generally need to include all dividends, even those under the $10 threshold.
How to Fill Out Schedule B
Schedule B is divided into two main sections: Part I (Interest Income) and Part II (Ordinary Dividends). Here’s how you can fill it out:
Part I: Interest Income
- Line 1: Enter your total interest income for the year. This includes interest from all sources, including savings accounts, bonds, CDs, and more. If you received Form 1099-INT or other statements, use the amounts reported on those forms.
- Line 2: If you received interest from foreign sources, you will report that income here. This may also apply if you have foreign bank accounts or investments.
- Line 3: Report the total interest from all sources (including foreign and domestic) combined.
If the total interest income exceeds $1,500, you must continue with Part I and list the sources of that income.
Part II: Ordinary Dividends
- Line 5: Enter your total ordinary dividend income for the year. If you received Form 1099-DIV from brokerage firms or companies where you have investments, use the total dividends reported on that form.
- Line 6: If you received foreign dividends or dividends from foreign sources, report them here.
- Line 7: Report the total ordinary dividends from all sources combined.
Part III: Foreign Accounts and Assets
If you have foreign bank accounts, foreign mutual funds, or any foreign financial assets, you may be required to report them in Part III. This section is important for compliance with the Foreign Account Tax Compliance Act (FATCA).
The IRS requires that taxpayers with foreign financial assets exceeding specific thresholds file additional forms, such as Form 8938. If you have foreign accounts, ensure that you accurately disclose them, as failure to do so could result in penalties.
How Does Schedule B Affect Your Taxes?
Schedule B does not directly affect the tax rate applied to your interest or dividend income; instead, it ensures that your income is properly reported to the IRS. However, the interest income and ordinary dividends reported on Schedule B are included in your total taxable income, which will determine your tax liability.
Interest and dividend income are typically taxed at your ordinary income tax rate, although some dividends may qualify for qualified dividend tax rates, which are usually lower. It’s important to know the difference between ordinary dividends and qualified dividends. Qualified dividends are generally taxed at a lower rate, and they must meet certain eligibility criteria.
Reporting Interest and Dividends Without Schedule B
If you receive less than $1,500 in interest income and ordinary dividends, you are not required to file Schedule B. In this case, you can simply report the amounts directly on Form 1040. However, if you have foreign accounts or foreign financial assets, you may still need to file additional forms.
Tips for Filing Schedule B
- Keep accurate records: Make sure to keep Forms 1099-INT and 1099-DIV from all financial institutions where you earn interest or receive dividends. These forms will show exactly how much interest and dividends you earned, making it easier to complete Schedule B.
- Watch for foreign income: If you have foreign investments or accounts, make sure you understand the IRS rules regarding reporting foreign income. If necessary, file Form 8938 along with Schedule B to comply with FATCA.
- Understand qualified dividends: Be aware that qualified dividends are taxed at a lower rate than ordinary dividends. If you receive qualified dividends, make sure they are reported correctly on your 1099-DIV form, and claim the appropriate tax treatment.
Conclusion
Schedule B (Form 1040) is essential for reporting your interest income and ordinary dividends. Whether you earn money from savings accounts, stocks, or mutual funds, Schedule B ensures that this income is accurately reported to the IRS. By carefully filling out this form, you can avoid penalties and make sure that your tax return is accurate.
