Nominee interest occurs when you receive interest income on behalf of someone else. In this situation, the interest is reported to you on Form 1099-INT, even though some or all of the income actually belongs to another person.
Because the IRS receives a copy of the Form 1099-INT, you'll generally need to report the full amount shown on the form on your tax return. Then, you can subtract the portion that belongs to the other person as nominee interest. This ensures your return matches IRS records while preventing you from paying tax on income that isn't yours.
A common example is a joint bank account where one account holder receives the Form 1099-INT, but part of the interest belongs to the other account holder. In that case, the recipient of the form reports the full amount and then adjusts for the nominee interest attributable to the other person.
How Do I Report Nominee Interest in the Program?
To enter nominee interest, follow these steps:
- Go to Federal.
- Select Income – Select My Forms.
- Choose 1099-INT, DIV, OID.
- Answer Yes to the question: "Did you earn any interest or dividend income from a bank, brokerage firm, or other financial institution?"
- Select Interest Income (Form 1099-INT).
- Enter the amount reported in Interest Income (Box 1).
- Enter the portion that belongs to someone else in the Nominee Interest field.
The program will calculate the adjustment so you're taxed only on the interest that belongs to you.
Where Will the Nominee Interest Adjustment Appear?
After you enter the nominee interest amount, the adjustment will be reflected on Schedule B (Interest and Ordinary Dividends), Part I, line 1. This reduces the taxable interest reported on your return to the amount that is actually attributable to you.
Why Is It Important to Report Nominee Interest Correctly?
Reporting nominee interest correctly helps you:
- Match the income reported to the IRS.
- Avoid paying tax on someone else's interest income.
- Reduce the chance of receiving an IRS notice regarding mismatched income.
- Ensure the actual owner reports the income on their own tax return.