WHAT IS Nominee Interest
Nominee interest is interest that a person collects on behalf of someone else. When a person receives nominee interest, they are responsible for either paying tax on that interest or passing the interest on to its rightful owner. If the person who receives the nominee interest opts to pass the money on to the other person, they must fill out and file form 1099-INT.
This form alerts the Internal Revenue Service (IRS) that the interest has changed hands. The nominee then adjusts their taxable income downward by the amount of the transferred interest, which they then report on Schedule B. In this way, the IRS will know that the person receiving the nominee interest is not responsible for paying taxes on that money, but that the other person is.
BREAKING DOWN Nominee Interest
Nominee interest may come into play if two people who do not file their taxes jointly share an investment. For example, a sister and brother may inherit money from a parent and use it to open 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.
If the brother chooses not to accept any of the interest this year, the sister must report and pay the full amount of tax. This could occur if the brother simply decided he would rather that his sister have the extra income that year, or if he had another reason to avoid collecting that income.
Form 1099-INT is the tax form that investors receive at the end of the year from any issuer of interest. A taxpayer will receive a different 1099-INT from each source of interest they receive. Interest is considered taxable, passive income in the U.S. tax code. Form 1099-INT details the type of interest income and related expenses that the investor has received during the tax year, so that the taxpayer may file their taxes accordingly. The only exception to this is when investors have received less than $10 in a tax year. Interest less than $10 does not need to be reported to the IRS.