Q: I was executor of my mother's estate who passed away April 2011. She owned many CDs that matured at different dates and were staggered into 2012. I cared for my husband during his terminal illness and he passed away November 2011. Times were stressful and I only dealt with the CDs that matured in 2011. My question is how do I handle the reporting of the interest income on the 1099s to IRS for the CDs that were closed in 2012? Some were in my name only and others in my name and a sister's as co-beneficiaries. Thank you for any help in this matter.
A: There are two interrelated parts to this answer. First, who is entitled to the interest on the CDs according to your mother's will and/or trust? Second, how do you avoid 1099-INT matching problems with the IRS? Let's deal with the first aspect of your situation, who is entitled to the interest income.
It's not entirely clear from your question if you inherited the CDs or you and your sister jointly inherited the CDs. If, in accordance with your mother's will and/or trust, you inherited the CDs, then you need to report the interest income. If you and your sister inherited the CDs, then you both need to report your share of the interest. In essence, the owner(s) of the inherited CDs reports the interest income in proportion to his/her ownership of the principal.
The second part of this question is how to avoid getting incorrect billing notices from the IRS when they try to match the interest reported on the 1099-INT forms that they receive from the payer to the tax return of the recipient reported on the 1099-INT. The way this is typically handled is to have the recipient listed on the 1099-INT report the entire amount of the interest on the Schedule B of their individual income tax return, then deduct the "nominee" portion of the interest that is properly reported by the other owner of the CD.
For example, if the 1099-INT form for a CD is issued in your name, but you and your sister own the CD equally, I would recommend that you report 100% of the interest, so that the IRS can match the 1099-INT to your return, then deduct your sister's portion of the interest as "nominee interest" from the Schedule B on your return. That way the IRS can match the 1099-INT to your return. But since you are reducing the interest income by the portion that should be reported by your sister, you are not overstating your income.
Be sure to let your sister know how much interest income she needs to report on her return, so that all of the interest income is reported.