A credit union serves a certain segment of society, not the public at large. Because a credit union operates as a nonprofit entity, it calls the money it adds to accounts dividends. It also considers its depositors members in a cooperative venture. Even though a credit union has a different purpose from a commercial bank, for income tax purposes, the Internal Revenue Service treats its dividends the same as bank interest.
Reporting Credit Union Interest
You must report credit union dividends as interest on your federal income tax return. Depending on which version you use, report the interest on line 8a of Form 1040 or Form 1040A, or report it on line 2 of Form 1040 EZ. If you have taxable interest from all sources exceeding $1,500, use Form 1040 or 1040A and list the interest on a separate Schedule B. Do not use Form 1040 EZ if your interest exceeds $1,500.
Certificates of Deposit
If you have a certificate of deposit (CD) account at your credit union, you may receive the dividends at set intervals during the duration of a long-term CD. You may receive the dividend on a CD with a term of less than one year only when it matures. In either case, include the interest on your federal income tax return when you actually get it or can obtain it without penalty. Do not include it if you must cash the CD early to get the interest. The yearly 1099-INT you receive from your credit union will reflect the amount of dividends actually paid.
Early Withdrawal Penalties
If you cash a CD account at a credit union before the maturity date, you usually have to pay a penalty. Your credit union will show the entire amount of your dividends in box 1 of your annual 1099-INT tax statement. List this amount as interest on your federal Form 1040. Then use line 30 of Form 1040 to subtract the amount of the penalty. Deduct the entire amount even if it exceeds your actual dividend or interest.
If you have a traditional IRA at your credit union, you do not generally pay federal income tax until you take a distribution. The money stays in the account earning interest tax-deferred until you take it out.
Credit Union Insurance
Protect the money in your accounts in case of credit union failure by choosing a credit union that belongs to the National Credit Union Administration (NCUA). This organization, similar to the Federal Deposit Insurance Corporation (FDIC), insures regular accounts in one name at any one credit union up to a limit of $250,000, as of May 2011. IRAs, trust accounts and joint accounts may qualify for additional insurance, depending on the title on the accounts. Deposits in insured credit unions have the full backing of the U.S. government. Look for the NCUA logo, or check the NCUA website to verify the account is insured.
Dividends Vs. Interest
Interest is the income received from bonds, bank CDs, saving accounts, bank money market accounts or loans made as a lender. Dividends...