Stocks and bonds are both important components of an effective investment strategy. Unfortunately, come tax time, it can be confusing to know where and how to report those investments and the income they generate. In general, there are four sources of income from stocks and bonds that need to be reported on your tax return: interest income, dividend income, short-term capital gains and long-term capital gains. Each will be reported in specific places on your federal tax return.
Exploring Interest Income
Interest income from bonds or mutual funds will be reported to you on form 1099-INT. You will receive a 1099-INT from any entity that has paid you interest over the previous year. Box 1 on this form will report all your taxable interest for the year. First, total all numbers from box 1 on all of your 1099-INT forms. Then, put this number onto Form 1040, line 8a. Box 2 of 1099-INT reports tax-exempt interest, such as interest from U.S. bonds. Though you will not pay federal income tax on this money, you will still report all totals from Box 2 on form 1040, line 8b.
If all of your taxable interest income totals more than $1,500 or various other special circumstances apply, like if you received interest from a seller-financed mortgage or a foreign account, you will also need to complete Schedule B: Interest and Ordinary Dividends. You will also only be able to use federal forms 1040A or 1040, not 1040EZ.
Evaluating Dividend Income
If you own stocks or mutual funds, you will likely receive dividend income in addition to interest income. If so, you will receive Form 1099-DIV: Dividends and Distributions from each entity that paid you dividends. Totaling all 1099-DIV forms, enter the amount from box 1a (ordinary dividends) on form 1040, line 9a. Enter the amount from box 2a (qualified dividends) on form 1040, line 9b. To report dividends, you must use the 1040A or 1040 versions of the federal tax return.
Just as with interest income, if you have over $1500 worth of ordinary dividends from all sources or various other circumstances apply such as if you received dividends as a so-called nominee on behalf of someone else, you need to fill out Schedule B.
Short-term Capital Gains
Short-term capital gains are profits on those assets which you sell after holding for less than one year. These gains will be taxed at the same rate as your regular income. Short-term capital gains of stocks or bonds will be reported on Form 8949: Sales and Other Dispositions of Capital Assets and Schedule D: Capital Gains and Losses.
First, you will list these assets on the first page of form 8949. Here, you list each asset sold, such as one type of stock or ownership in one mutual fund. You list the date each asset was acquired, date sold, proceeds, original cost of the asset, and then calculate the gain (proceeds minus cost). Each asset you sell in a given year will be listed on its own separate line. You will total all the gains (or losses) from these sales and report the final figure on lines 1, 2 or 3 of Schedule D. The remainder of Schedule D will help you determine the amount of tax you owe on your capital gains.
Long-term Capital Gains
Long-term capital gains are profits on those stocks, bonds, and other investments that you sell after holding for one year or more. Though the long-term capital gains rate has not always stayed the same from year to year, it is generally lower than the short-term capital gains rate. These assets are also listed on form 8949 (though on the second page instead of the first) and Schedule D (lines 8, 9 or 10). Schedule D will compute the correct amount of tax owed on your long-term gains from stocks and bonds.