What Is IRS Publication 550?
Let me tell you directly: IRS Publication 550 is the IRS's guide on handling investment income and expenses for your taxes. It covers what expenses you can deduct, when to report gains and losses from selling investment property, and which investments count as taxable.
Understanding IRS Publication 550
If you're buying U.S. property from a foreign person or company, you might need to withhold income taxes— that's something you have to handle. As a U.S. citizen, you must report income from foreign investments, even without a Form 1099; check IRS Publication 515 for more on that. Employees exercising stock options face special tax rules, and IRS Publication 525 has the details you need.
What's In IRS Publication 550?
This is one of the IRS's more complex areas, focusing on tax treatment for investment income and expenses. For individual shareholders in mutual funds or regulated investment companies like money market funds, it lays out the rules plainly.
You'll find explanations on taxable investment income and deductible expenses, plus how and when to report them on your tax return. It guides you on calculating and reporting gains and losses from disposing of investment property. There's also coverage of property trades and tax shelters.
A useful table in the publication shows where to report different investment incomes on your return—originally for Forms 1040, 1040A, and 1040EZ, but now just stick to 1040 since the others are gone.
Interest Income Coverage
The publication dives into interest income, covering money market funds, certificates of deposit, early withdrawal penalties, account-opening gifts, interest on insurance dividends, prepaid premiums, U.S. obligations, tax refund interest, installment sale proceeds, insurance contract interest, usurious interest, frozen deposit interest, below-market loans, foreign interest, U.S. Savings Bonds, education savings bonds, bonds sold between interest dates, U.S. Treasury Bills and Notes, state or local government obligations, mortgage revenue bonds, and Original Issue Discount (OID). You need to know these to report accurately.
Treatment of Dividends
Dividends get thorough treatment, starting with ordinary dividends—the typical distributions from corporations or mutual funds. Qualified dividends are highlighted, taxed at the same rates as net capital gains: 0%, 15%, or 20%. Capital gain distributions from mutual funds and REITs are explained in detail, so you can handle them on your taxes without issues.
