Schedule B Overview

Schedule B (Form 1040) reports interest income (Part I), ordinary dividends (Part II), and foreign accounts and trusts (Part III). Understanding when this form is required and how to complete each section is essential for EA exam success.

When Schedule B Is Required

You must file Schedule B if any of the following applies:

Important: Even if interest and dividends total less than $1,500, you must file Schedule B if you have foreign accounts or received seller-financed mortgage interest.

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Part I: Interest Income

Part I lists all sources of taxable interest income. Each payer must be listed separately with the corresponding amount from Form 1099-INT.

Line-by-Line Instructions

Excludable Interest (Line 3 Subtractions)

Seller-Financed Mortgage Interest: When you receive interest from a seller-financed mortgage where the buyer uses the property as a personal residence, you must:

• List the interest on Line 1
• Report the buyer's name, address, and SSN
• A $50 penalty applies if you fail to include the buyer's SSN or fail to provide your SSN to the buyer

Accrued Interest on Bonds: When you purchase a bond between interest payment dates, you pay the seller for interest accrued since the last payment. When you receive your first interest payment:

• The 1099-INT includes the full interest payment
• You subtract the accrued interest you paid (label as "Accrued Interest")
• This prevents double taxation on interest earned by the prior owner

Nominee Interest: If you received interest as a nominee (reported on 1099-INT in your name but actually belonging to another person):

• Report the full amount on Line 1
• Subtract the nominee portion (label as "Nominee Distribution")
• Issue Form 1099-INT to the true owner (unless the owner is your spouse)
• File Forms 1096 and 1099-INT with the IRS

Series EE and I Savings Bond Elections

Taxpayers can choose to report interest on Series EE and I bonds:

• Cash method (default): Report interest when bonds are redeemed or mature
• Accrual method (election): Report interest annually as it accrues

Key rule: If you elect to report interest annually, this election applies to all Series EE and I bonds you currently own and any future purchases. The election is binding unless you request IRS permission to change methods.

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Part II: Ordinary Dividends

Part II lists all sources of ordinary dividends from Form 1099-DIV, Box 1a.

What Goes on Schedule B

Capital Gain Distributions (Box 2a)

Capital gain distributions from mutual funds and REITs represent your share of the fund's net realized long-term capital gains. These go directly to Schedule D, Line 13—not Schedule B.

Exam tip: Do not confuse ordinary dividends with capital gain distributions. The 1099-DIV separates them clearly.

Nondividend Distributions (Box 3)

Nondividend distributions represent a return of capital, not income. They:

• Are not taxable until they reduce your basis to zero
• Reduce your stock basis dollar for dollar
• Appear on Form 1099-DIV, Box 3
• Do NOT appear anywhere on Schedule B

Example: You purchase stock for $10,000. You receive a $500 nondividend distribution. Your new basis is $9,500. No current tax is due, but when you sell the stock, your gain will be $500 higher.

Once basis reaches zero: Any additional nondividend distributions become capital gains reported on Schedule D and Form 8949.

Nominee Dividends

The same rules apply as for nominee interest:

• Report the full amount from your 1099-DIV
• Subtract the nominee portion
• Issue Form 1099-DIV to the true owner

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Part III: Foreign Accounts and Trusts

Part III contains critical compliance questions about foreign financial accounts. Mistakes here trigger significant penalties.

Question 7a: Foreign Account Interest or Authority

You must answer "Yes" if you had:

• Financial interest in a foreign account, OR
• Signature authority over a foreign account

The $10,000 aggregate threshold: If the combined maximum value of all foreign accounts exceeded $10,000 at any time during the year, you must:

1. Answer "Yes" to Question 7a
2. File FinCEN Form 114 (FBAR) electronically with the Financial Crimes Enforcement Network

Penalty for non-willful failure to file: Up to $16,117 per report (2024 inflation-adjusted).

Penalty for willful failure to file: The greater of $161,166 or 50% of account balance per violation.

Question 7b: Country of Accounts

If you answered "Yes" to 7a, list the countries where accounts are located. You do not need to list account numbers or balances on Schedule B.

Question 8: Foreign Trusts

You must answer "Yes" if you:

• Received a distribution from a foreign trust
• Were a grantor of a foreign trust
• Were a transferor to a foreign trust

Additional reporting on Form 3520 or Form 3520-A may be required.

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Common Schedule B Errors

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Reporting Summary