TAXES > Individuals > Gross Income > Interest and Dividends (Schedule B)

Interest and Dividends

Cash basis taxpayers must report interest and dividends in the tax year they are actually or constructively received, regardless of when the interest or dividend is accrued on the debtor's books. Interest is not constructively received if taxpayer's control of its receipt is subject to substantial limits or restrictions. Thus, interest on a six-month certificate that is not credited or made available before maturity without penalty is not taxable until the certificate is redeemed or matures. Savings institution interest, or interest on life insurance dividends left to accumulate, is considered received when credited to the depositor's (policyholder's) account and subject to his withdrawal. Where a bank charges a penalty for premature withdrawals from a time savings account, the gross amount of interest paid or credited during the withdrawal year must be reported as interest that year, even if the penalty partially or completely offsets the interest. That penalty, however, is deductible as an adjustment to income on Form 1040, line 30. Matured interest coupons are constructively received in the year they mature unless it can be shown that there are no funds available for payment of the interest during the year.

Accrual basis taxpayers report interest and dividends in the tax year in which the right to receive the interest becomes fixed, regardless of when it is received. But if it appears reasonably certain the interest won't be paid because the debtor is insolvent, the creditor can delay reporting the interest until its collection appears reasonably certain. For cash and accrual taxpayers, there are special rules on when to include "interest" on below-market rate loans. The rules above do not apply to debt issued with original issue discount (OID).

Dividends on mutual funds are taxable as they are paid into the taxpayer's account regardless of whether or not they are reinvested.

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