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1040 Schedule B: What Is it? Do You Need to Use It?

By Jason Hall - Sep 22, 2015 at 8:20AM

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If you have taxable interest or dividend income of more than $1,500, you probably will use this schedule when you file income taxes. There's more. Here's a look.

In this world nothing can be said to be certain, except death and taxes.
-- Ben Franklin

For investors, the taxes part can get complex, depending on how you generate income during the course of the year. In order to help determine what your tax is, many filers will need to use Form 1040 Schedule B. Let's take a closer look at the situations where you'll use Schedule B, and explain why it matters.

Income from multiple sources 
As time passes, your sources of income can start to vary, including dividends, interest from bonds, real estate. This would be on top of your regular earnings from your employer, or business, if self-employed. The primary purpose of the 1040 Schedule B is to report income from interest, ordinary dividends, and foreign accounts. 

One of the reasons why is that these types of income are often subject to different taxes than earnings from your job. For example, interest income, such as from bonds, CDs, and savings accounts, is taxed at your marginal rate, while dividends are taxed as long-term gains, which is either 15% or 20%, depending on your total earnings. The 1040 Schedule B captures and breaks out these different income sources and totals, so you are taxed at the proper rate for that kinds of income.

You also must use Schedule B if you had a foreign account, or received a distribution from, were a grantor of, or a transferer to, a foreign trust. If this is the case, you may have to fill out additional forms related to foreign income. If you paid taxes on this income in the country they are located, you may get a credit toward your federal taxes. 

When would you use Schedule B? 
According to the Internal Revenue Service, here are the situations when you'd need to use this schedule:

  • You had more than $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.
  • You have accrued interest from a bond.
  • You are reporting original issue discount, or OID, in an amount less than the amount shown on Form 1099-OID.
  • You are reducing your interest income on a bond by the amount of 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.
  • 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. Part III of the schedule has questions about foreign accounts and trusts.

Foolish bottom line 
When your income starts to come in from multiple sources, filing your taxes can get complex. Schedule B is meant to help identify different kinds of income, so you can be sure to pay the proper tax for each type. But with that said, if you're using Schedule B, there's a good chance your return will be pretty complex. 

If you fall into more than one of the categories above, it's probably a good idea to use a tax professional, or a popular tax-filing program, to help you out. The sheer number of forms and schedules alone can make the time to try to figure it out on your own worth a lot more than the cost of a professional or good tax software, even if you understand the forms, tax code, and schedules. These days, even the tax pros are using software to simplify the process and avoid costly errors. 

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