Publication 550 |
2000 Tax Year |
General Information
A few items of general interest are covered here.
Recordkeeping.
You should keep a list
showing sources and amounts of investment income that you receive
during the year. Also, keep the forms you receive that show your
investment income (Forms 1099-INT, Interest Income,
and 1099-DIV, Dividends and Distributions, for
example) as an important part of your records.
Tax on investment income of a child under age 14.
Part of a child's 2000 investment income may be taxed at the
parent's tax rate. This may happen if all of the following are true.
- The child was under age 14 on January 1, 2001.
- The child had more than $1,400 of investment income (such as
taxable interest and dividends) and has to file a tax return.
- Either parent was alive at the end of 2000.
If all of these statements are true, Form 8615
must be completed and attached to the
child's tax return. If any of these statements is not true, Form 8615
is not required and the child's income is taxed at his or her own tax
rate.
However, the parent can choose to include the
child's interest and dividends on the
parent's return if certain requirements are met. Use Form 8814
for this purpose.
For more information about the tax on investment income of children
and the parents' election, see Publication 929,
Tax Rules for
Children and Dependents.
Beneficiary of an estate or trust.
Interest, dividends, and other investment income you receive as a
beneficiary of an estate or trust is generally taxable income. You
should receive a Schedule K-1 (Form 1041), Beneficiary's
Share of Income, Deductions, Credits, etc., from the fiduciary.
Your copy of Schedule K-1 and its instructions will tell you
where to report the income on your Form 1040.
Social security number (SSN).
You must give your name and SSN to any person required by federal
tax law to make a return, statement, or other document that relates to
you. This includes payers of interest and dividends.
SSN for joint account.
If the funds in a joint account belong to one person, list that
person's name first on the account and give that person's SSN to the
payer. (For information on who owns the funds in a joint account, see
Joint accounts, later.) If the joint account contains
combined funds, give the SSN of the person whose name is listed first
on the account.
These rules apply both to joint ownership by a married couple and
to joint ownership by other individuals. For example, if you open a
joint savings account with your child using funds belonging to the
child, list the child's name first on the account and give the child's
SSN.
Custodian account for your child.
If your child is the actual owner of an account that is recorded in
your name as custodian for the child, give the child's SSN to the
payer. For example, you must give your child's SSN to the payer of
dividends on stock owned by your child, even though the dividends are
paid to you as custodian.
Penalty for failure to supply SSN.
You will be subject to a penalty if, when required, you fail to:
- Include your SSN on any return, statement, or other
document,
- Give your SSN to another person who has to include it on any
return, statement, or other document, or
- Include the SSN of another person on any return, statement,
or other document.
The penalty is $50 for each failure up to a maximum penalty of
$100,000 for any calendar year.
You will not be subject to this penalty if you can show that your
failure to provide the SSN was due to a reasonable cause and not to
willful neglect.
If you fail to supply an SSN, you may also be subject to backup
withholding.
Backup withholding.
Your investment income is generally not subject to regular
withholding. However, it may be subject to backup withholding to
ensure that income tax is collected on the income. Under backup
withholding, the bank, broker, or other payer of interest, original
issue discount (OID), dividends, cash patronage dividends, or
royalties must withhold, as income tax, 31% of the amount you are
paid.
Backup withholding applies if:
- You do not give the payer your identification number (either
a social security number or an employer identification number) in the
required manner,
- The Internal Revenue Service (IRS) notifies the payer that
you gave an incorrect identification number,
- The IRS notifies the payer that you are subject to backup
withholding on interest or dividends because you have underreported
interest or dividends on your income tax return, or
- You are required, but fail, to certify that you are not
subject to backup withholding for the reason described in (3).
Certification.
For new accounts paying interest or dividends, you must certify
under penalties of perjury that your social security number (SSN) is
correct and that you are not subject to backup withholding. Your payer
will give you a Form W-9,
Request for Taxpayer
Identification Number and Certification, or similar form, to
make this certification. If you fail to make this certification,
backup withholding may begin immediately on your new account or
investment.
Underreported interest and dividends.
You will be considered to have underreported your interest and
dividends if the IRS has determined for a tax year that--
- You failed to include any part of a reportable interest or
dividend payment required to be shown on your return, or
- You were required to file a return and to include a
reportable interest or dividend payment on that return, but you failed
to file the return.
How to stop backup withholding due to underreporting.
If you have been notified that you underreported interest or
dividends, you can request a determination from the IRS to prevent
backup withholding from starting or to stop backup withholding once it
has begun. You must show that at least one of the following situations
applies.
- No underreporting occurred.
- You have a bona fide dispute with the IRS about whether
underreporting occurred.
- Backup withholding will cause or is causing an undue
hardship, and it is unlikely that you will underreport interest and
dividends in the future.
- You have corrected the underreporting by filing a return if
you did not previously file one and by paying all taxes, penalties,
and interest due for any underreported interest or dividend payments.
If the IRS determines that backup withholding should stop, it will
provide you with a certification and will notify the payers who were
sent notices earlier.
How to stop backup withholding due to an incorrect
identification number.
If you have been notified by a payer that you are subject to backup
withholding because you have provided an incorrect SSN or employer
identification number, you can stop it by following the instructions
the payer gives you.
Table 1-1 Where to Report Common Types of Investment Income
Reporting backup withholding.
If backup withholding is deducted from your interest or dividend
income or other reportable payment, the bank or other business must
give you an information return for the year (for example, a Form
1099-INT) that indicates the amount withheld. The information
return will show any backup withholding as "Federal income tax
withheld."
Nonresident aliens.
Generally, payments made to nonresident aliens are not subject to
backup withholding. You can use Form W-8BEN,
Certificate of Foreign Status of Beneficial Owner for United
States Tax Withholding, to certify exempt status. However, this
does not exempt you from the 30% (or lower treaty) withholding rate
that may apply to your investment income. For information on the 30%
rate, see Publication 519,
U.S. Tax Guide for Aliens.
Penalties.
There are civil and criminal penalties for giving false information
to avoid backup withholding. The civil penalty is $500. The criminal
penalty, upon conviction, is a fine of up to $1,000, or imprisonment
of up to 1 year, or both.
Where to report investment income.
Table 1-1 gives an overview of the forms and
schedules to use to report some common types of investment income.
But, see the rest of this publication for detailed information about
reporting investment income.
Joint accounts.
In a joint account, two or more persons hold property as joint
tenants, tenants by the entirety, or tenants in common. That property
can include a savings account, bonds, or stock. Each person may
receive a share of any interest or dividends from the property as
determined by local law.
Example.
You and your husband have a joint money market account. Under state
law, half the income from the account belongs to you, and half belongs
to your husband. If you file separate returns, you each report half of
the income.
Income from property given to a child.
Property you give as a parent to your child under the Model Gifts
of Securities to Minors Act, the Uniform Gifts to Minors Act, or any
similar law, becomes the child's property.
Income from the property is taxable to the child, except that any
part used to satisfy a legal obligation to support the child is
taxable to the parent or guardian having that legal obligation.
Savings account with parent as trustee.
Interest income from a savings account opened for a child who is a
minor, but placed in the name and subject to the order of the parents
as trustees, is taxable to the child if, under the law of the state in
which the child resides, both of the following are true.
- The savings account legally belongs to the child.
- The parents are not legally permitted to use any of the
funds to support the child.
Accuracy-related penalty.
An accuracy-related penalty of 20% can be charged for underpayments
of tax due to negligence or disregard of rules or regulations or
substantial understatement of tax. For information on the penalty and
any interest that applies, see Penalties in chapter 2.
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