Nominee Distribution

What Is Nominee Distribution?

Nominee Distribution is interest income reported on IRS Form 1099-INT that a taxpayer designates as being the interest income of a different individual. A taxpayer may choose to make a nominee distribution if he or she jointly owns an account with someone who is not their spouse and the financial institution where the account is located reports all the interest earned on that account as being earned by only one of the account holders. Essentially, a nominee distribution exists to ensure that every individual within a joint account pays their appropriate tax on the interest in the funds of the joint account because legally, the interest accrued is attributed to only the account owner or one party member.

Understanding Nominee Distribution

Nominee Distribution requires the taxpayer who received the 1099-INT from the financial institution to use Schedule B, Interest, and Ordinary Dividends, to report the entire amount of their own accumulated interest. Below that the taxpayer writes "nominee distribution" and enters the amount of interest that really belongs to the other account holder. By subtracting the nominee distribution, the taxpayer avoids paying tax on interest income that isn't really theirs. The rightful owner pays the tax instead. In addition, to form 1099-NIT, the joint account owner must also file form 1096 in order to pay the tax on their share of the accumulated interest. Any nominee of the account must file a 1099 with both the IRS and the account owner to show their portion paid of the proceeds. Nominee distribution is not limited to two sole members of an account; instead it can be made among several members of a joint account, providing they each file their own respective paperwork to the government and the account owner.

Example of Nominee Distribution

There are several ways nominee distribution in a joint account could work. Two business partners, for example, could set up a joint account together to combine financial resources in order to accumulate more income interest, but file for nominee distribution so that each partner could pay their own share of tax on that interest. Or, a parent could set up a joint account to help oversee their minor child’s joint account or utilize earning power, but still file a nominee distribution for tax filing purposes. Nominee distribution could also be used by couples who are not married by have a joint savings account and pay taxes separately.