Chapter 13: Interest, Dividends, and Other Investments. 13: Interest, Divdends and Other Investments

Transcription

1 Page Chapter 13: Interest, Dividends, and Other Investments 1 13: Interest, Divdends and Other Investments

2 Learning Objectives Page Upon completion of this seminar, participants should be able to Determine the taxability and filing requirements for interest, dividends, and other investments. Calculate premium and discounts on Original Issue Discount (OID). Determine when the below market interest rate rules apply. 2 13: Interest, Divdends and Other Investments

3 Key Developments Page IRS maintains a list of publicly traded discount bonds on its website. Page 199 There have been changes of reporting requirements for brokers of debt instruments and options. Page 201 If the taxpayer has elected the constant yield method the broker cannot report based on that election. Page : Interest, Divdends and Other Investments

4 Page 197 II. Qualifying Dividends: Taxed at Capital Gain Rates Discussions with taxpayers to assist them in understanding the advantage of qualified dividends can be an important tax saver, but NIIT can change. 4

5 III. Interest Reporting Page 198 A. What about those 1099 problems? All amounts reported on Form 1099-INT or 1099-DIV are not yours 5

6 III. Interest Reporting Page 198-Bonus Reminder: Note that EE Savings Bonds issued in 1987 must report ALL accrued interest as they have reached final maturity in 2017 (30 years) 6

7 III. Interest Reporting Page 198-Bonus Some problems with EE Savings Bonds. What are they worth? - treasurydirect.gov/bc/sbcprice 7

8 III. Interest Reporting Page 198-Bonus Some problems with EE Savings Bonds. Bonds are discovered that are past maturity, when should the tax be paid: The law says that an amended return should be filed for the year of maturity without regard to whether the statute has closed, IRC 454(c) and Reg (a)(1). As a practical matter the IRS accepts the income in the year of discovery for closed years. 8

9 OID bond reporting can be complicated In the last several years there has been significant changes to reporting requirements for OID instruments: By a show of hands: A.We see very few clients with these types of investments. B.OID is so complicated we most often accept the 1099-B as the correct answer. C.Our firm has a significant number of client s with OID instruments which we comply with the law to the best of our ability. D.What the heck is an OID? 9

10 IV. Original Issue Discount (OID) Page 199 This listing is currently only available by request at: There is no indication of whether IRS will change the procedure for the 2017 OID listing 10

11 V. Bond Pricing Overview Page There are multiple conditions that can occur upon the acquisition of an OID instrument: Par Bond was purchased at stated prices, i.e. SRPM (stated redemption price at maturity) Discount Happens in two ways: The discount that normally occurs in an OID instrument. Market Discount In the market below adjusted issues price. 11 Premium An amount larger than the adjusted issues price.

12 V. Bond Pricing Overview Page 200 Bond issued at less that stated redemption price is an OID (Original Issue Discount Bond) 12

13 VI. Discount/Premium Methods Page There are two methods that can be used to determine the amortization of the premium or discount: 1. Ratable Method Earned/Consumed on a daily basis during the remaining period until maturity. 2. Current Yield to Maturity Method Calculate a constant rate of return on the accrued portion of the bond until maturity 13

14 VI. Discount/Premium Methods Page 201 How it works Your client will be asked based on the new regs. what is their method of choice, if no response the Ratable Yield method will be used. 14

15 VI. Discount/Premium Methods Page 201 B. Reporting now required for all debt instruments and options: 1. Taxable Instruments Acquired after 12/31/ Tax-Exempt Instruments Acquired after 12/31/2016 C. OID Acquisition Premium required to be reported per above schedule effective 03/12/

16 Page 202 VII. Original Issue Discount on Taxable Bonds A. Government and Corporate bonds will report OID calculated using the constant yield method, for bonds acquired after 04/03/1992 but before 04/04/1994. C. For debt instruments acquired after 12/31/2014 there is no election available to have broker report OID using the constant yield method for basis calculations. 16

17 Page 202-Bonus VII. Original Issue Discount on Taxable Bonds This is very helpful tool for assisting with calculations - wsc.com/portal/oid/oid_tutorial.html 17

18 Page 203 IX. Market Discount Bonds Caution Market Discounts are not taxable until the bond is disposed. IRC 1278(b) However an election can be made to recognize the income ratably over the remaining life of the bond. Absent the election the discount taxation will be deferred until the bond is disposed of. 18

19 Page 203 VII. Market Discount Bonds Whether the information provided is correctly calculated is up to the taxpayer as the broker is required simply based on the information available. 19

20 X. Market Premium Bonds Page 205 The whole premium issue is required on the ratable basis, unless under election is very straight forward Premium Paid $ 5,000 Remaining Days 1000 Daily Premium $ 5 20

21 XI. Peer to Peer Lenders Page Tax Reporting 21

22 XI. Peer to Peer Lenders Page A helpful source of information is Lend Academy at lendacademy.com/lending-club-prosper-taxinformation-2017/ 22

23 XII. Real Estate Investment Trusts (REIT) Page 206 The basics of a REIT Real Estate Holding or Financing Company that trades like a stock. Dividends paid retain their character Real Estate Income is Ordinary Investments by the REIT LTCGs from sale of REIT assets Form 2439 when tax is paid by REIT on sale 23

24 XII. Real Estate Investment Trusts (REIT) Page 206 The basics of a REIT Dividend distributions almost always include Return of Capital Keep basis records as correct realized gain/loss reporting on Form 1099-B is hit and miss. A REIT will normally contain UBI, income that would create tax (Form 990-T) in a tax exempt trust such as a retirement plan, most REITs use debt financing but many do not 24

25 XIII. Widely Held Fixed Investment Trusts (WHFIT) Page What to look for in a WHFIT Normally hold low risk assets Treated as a grantor trust Interest reported on 1099-INT Dividends reported on 1099-DIV Many WHFITs are conduits for REMICs which can have 1099-OID reporting 25

26 XIV. Below-Market Interest Rates (IRC 7872) Page 207 Normally a loan is subject to minimal interest rates as publish by IRS in the AFR tables monthly. Short term < 3 years Mid term > 3 but < 9 Long term > 9 Based on month prior to loan origination There are multiple situations when it is allowed for loans to be made with no interest allowing no imputation of interest amounts, such as the corporate di minimus exception of $10,000 26

27 XIV. Below-Market Interest Rates IRC 7872 Page 208 As loan is < $100,000 and investment income is < $1,000 But when investment income exceeds $1,000 27