Personal Finance: Ask the Experts

Get advice on money matters from The Bee's Claudia Buck and a panel of local experts

January 26, 2013
How do I report interest income from inherited CDs?

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.
Connie
Roseville, CA

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.

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Meet Our Financial Experts

Claudia Buck

Claudia Buck is The Sacramento Bee's personal finance columnist. Read all her columns here. Contact her at cbuck@sacbee.com

Terri Carpenter

Terri Carpenter offers advice on job hunting, retraining and career counseling. Carpenter works at Sacramento Works Inc., the career and job training arm of the Sacramento Employment and Training Agency (SETA). With 15 years in the field, she has hands-on experience with everyone from first-time job seekers to career professionals seeking advice after a layoff or looking for a mid-career change. Ask her a question.

Carlena Tapella

Carlena Tapella is a partner in the law firm of Webb & Tapella Law Corp. in Sacramento. The firm specializes in estate planning and probate, such as estates, trusts, conservatorships and litigation. She is a past president of the Sacramento County Bar Association's Estate Planning & Probate Section. Ask her a question.

Kimberly Foss

Kimberly Foss, certified financial planner, is the founder of Empyrion Wealth Management in Roseville. With nearly 30 years in the financial industry, her clients include women in transition, small business owners, retirees and "pre-retirees." Ask her a question.

Jesse Weller

Gregory Burke, a CPA and tax expert with John Waddell & Co. in Sacramento since 1984, worked as an IRS tax auditor for six years. He’s a past chairman of the California Society of CPAs. Ask him a question.

Daniel Tahara

Daniel Tahara takes your questions about California taxes. Tahara, a spokesman for the state Franchise Tax Board, has 10 years of experience as a tax auditor. Ask him a question.



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