DEFINITION of 'Nominee Interest'

An interest payment that a person receives on behalf of someone else. If you receive nominee interest, also called a nominee distribution, you are responsible for paying income tax on it, unless you pass the interest on to its rightful owner. You must notify the IRS of the transfer in order to remove your obligation to pay taxes on the entire amount of interest. The recipient of nominee interest should use IRS form 1099-INT to notify both the IRS and the interest recipient that the interest income has been transferred. The nominee then adjusts his or her taxable income downward by the amount of the transferred interest, which he or she reports on Schedule B. The recipient pays the tax on the interest he or she received.

BREAKING DOWN 'Nominee Interest'

Such a situation might arise if a sister and brother opened a savings account together. Because the sister is listed first on the account, the bank reports to the IRS that she received the full amount of interest. Since she actually shared the interest with her brother, she must file form 1099-INT, so that the IRS will only hold her responsible for the portion of the interest she actually kept. Her brother will receive a copy of the 1099-INT indicating which portion of the interest he received and is responsible for paying tax on.

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