Managing Tax Information From Brokerage Accounts

Brokerage accounts report income at the end of each year on form 1099. They are required to send these reports to their customers by February 28 of the following year so they can be included on your income tax return. The 1099 report segregates income by type--interest (taxable, tax exempt and accrued interest paid), dividends (including total dividends and qualified dividends), capital gains distributions and stocks and bonds sales.

Instructions

1. Report interest income on Schedule B. Ordinary interest income and accrued interest paid are taxable at your marginal income tax rate. Tax exempt income is also reported on Schedule B. Treasury bond interest is taxable on your federal income tax return, but it is tax exempt to the state if you live in a state that requires filing a state tax return. Municipal bond interest is not taxable on the federal 1040, but may be taxable to the state unless you live in the state that issued the bonds. In-state municipal bond interest is tax exempt on both federal and state income tax returns.

2. List dividend income on Schedule B. The brokerage 1099 will report total dividends and any amounts of these dividends that are qualified dividends. All your dividend income is taxable, but qualified dividends are taxed at a lower rate. If you are in the 10 percent or 15 percent tax brackets, your tax rate for qualified portions of dividend income is five percent. If your marginal tax rate is 25% or higher, the qualified dividends tax rate is 15 percent.

3. Record capital gains distributions on Schedule B, also. These distributions are treated as long term capital gains (gains on stocks, bonds and mutual funds held for more than one year). The tax rate of these distributions depends on your marginal tax rate. If you are in the 10% or 15% tax brackets, the tax rate on capital gains distributions is five percent. If your marginal tax rate is 25 percent or higher, the tax rate on capital gains distributions is 15 percent.

4. Use Schedule D to report the sale of stocks, bonds and mutual funds. You'll need to know your basis in these securities (how much you paid when you purchased the securities). If you purchased the securities from the brokerage company reporting the sales, the 1099 usually gives you this basis information. If you transferred the securities into the brokerage account after you bought them, you may need to consult your own records to determine the basis. On Schedule D, you must record the date of the purchase, the cost (your basis), the date of the sale and the sale price. If you sold the securities for more than you paid for them, you have a gain. If you sold them for less than you paid for them, you have a loss. If the purchase and sale occurred within one 12 month period, it's a short term gain or loss, taxed at your marginal tax rate. If the sale occurred more than a year after you purchased the securities, you have a long term capital gain or loss. A long term capital gain is taxed at five percent if you are in the 10 percent or 15 percent tax brackets and at 15 percent if you are in the 25 percent bracket or higher.

Tips & Warnings

• Non-taxable distributions may also be reported in a brokerage 1099. These distributions are considered a return of capital and are not reportable or taxable.