Other taxable income

 

Interest Income

Interest income follows wage income on your 1040. If you received more than $10 in interest from a bank or other financial institution, you should receive a 1099-INT. This should include payments from individual bonds that you hold, but not tax-free bonds.

If you receive tax-free interest, you won't receive a 1099, but the IRS still wants to know how much tax-free interest you received. However, make sure you don't include tax-free interest in your taxable income.

If you received more than $400 in taxable interest or dividends, you'll have to fill out Schedule B. If you have a money market mutual fund or bond mutual fund, notice that payments you receive from these funds aren't called interest payments.

Money market mutual fund payments may look like interest payments, but distributions from funds are called dividends or capital gains distributions, or possibly a return of capital. Don't count any of these as interest payments either.

These payments will be disclosed to you on a 1099-DIV statement from your mutual fund. Notice you'll only receive these statements for your taxable mutual funds. If you hold tax-sheltered mutual funds, like money in an IRA or 401(k), you shouldn't receive a 1099 until you actually withdraw money from the account, usually after you retire.

Taxable refunds

After you fill in your taxable interest, you'll have to enter your taxable refunds. This line mostly concerns those who itemize their deductions. If, for example, you itemized your deductions and you received a refund for last year's state income taxes, you may have to report the refund as taxable income.

If you didn't itemize last year, you shouldn't have to worry about this income item.

Alimony received

If you received alimony, you'll have to report it as income. Alimony payments are deductible by the payer, and income to the recipient.

Alimony is strictly defined by the IRS, and alimony is not child support. Child support is not deductible by the payer, and not treated as income to the recipient.

Alimony gives an opportunity for tax arbitrage. Because of the multi-bracket tax system, there's a way for people to lower their taxes by shifting income to a person in a lower tax bracket.

Alimony and tax arbitrage

If one ex-spouse makes a lot of money, and is therefore in a high bracket, that person can cut his or her taxes by shifting income to an ex-spouse in a lower bracket. This can be done in such a way that both ex-spouses win, and the government loses.

To try to prevent this, the IRS has set up so-called recapture rules for alimony. Calculations for this are complex, and are a good example of how graduated taxes create a complicated tax system.

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