What Is 1040b and When Do You Need to File It?

Tax forms can be confusing, especially when they have similar names. Form 1040-B is often mistaken for other tax documents, but it serves a specific purpose in reporting certain types of income. Understanding its function ensures compliance with IRS rules and helps avoid penalties.

This form applies when taxpayers receive specific kinds of investment income. Failing to file when required can lead to IRS complications.

When the Form Is Required

The IRS requires Form 1040-B for taxpayers with investment income not reported on standard wage or salary documents. This includes earnings from financial assets that generate returns outside traditional employment. Filing depends on the type and amount of income received, as well as IRS reporting thresholds.

One common situation requiring Form 1040-B is when a taxpayer receives distributions from investment accounts not automatically reported on a Form 1099. Financial institutions may not issue tax documents for smaller amounts, but all taxable earnings must still be reported.

Another instance is when investment income is received without automatic withholding. Unlike wages, which typically have taxes deducted before payment, investment-related earnings often do not. Taxpayers must calculate and report their own tax obligations and make estimated payments if necessary.

Types of Reportable Income

Form 1040-B is used to report specific types of investment income, including taxable interest, ordinary dividends, and nominee distributions.

Taxable Interest

Taxable interest includes earnings from savings accounts, certificates of deposit (CDs), corporate bonds, and Treasury securities. All interest income must be reported, even if a taxpayer does not receive a Form 1099-INT. For example, if a taxpayer earns $15 in interest but does not receive a 1099-INT because banks only issue them for amounts exceeding $10, they must still report it.

Some interest income is treated differently for tax purposes. Interest from municipal bonds is generally exempt from federal taxes but may be taxable at the state level. Interest from U.S. Treasury bonds is taxable federally but exempt from state and local taxes. Bonds that accrue interest over time but do not pay out until maturity may still require annual reporting under original issue discount (OID) rules.

Ordinary Dividends

Ordinary dividends are payments from corporations to shareholders, typically from company profits. These are reported on Form 1099-DIV if they exceed $10, but all dividend income must be included on a tax return. Ordinary dividends are taxed as regular income at rates ranging from 10% to 37% in 2024, unlike qualified dividends, which are taxed at lower capital gains rates.

For example, if an investor receives $500 in ordinary dividends from a mutual fund and falls into the 22% tax bracket, they would owe $110 in federal taxes on this income. Some dividends may also be subject to the Net Investment Income Tax (NIIT), an additional 3.8% tax for individuals with modified adjusted gross income exceeding $200,000 ($250,000 for married couples filing jointly).

Nominee Distributions

Nominee distributions occur when a taxpayer receives investment income on behalf of another person, common in joint investment accounts or when a taxpayer holds securities for someone else. If a taxpayer receives a Form 1099-INT or 1099-DIV that includes income belonging to another individual, they must allocate the correct portion and issue a nominee Form 1099 to the rightful recipient.

For example, if two siblings jointly own a brokerage account and receive $1,000 in dividends, but one sibling is entitled to only 40% of the income, the other must file a nominee 1099-DIV to report the $600 portion that does not belong to them. The IRS requires nominee filers to submit these forms by January 31 of the following year and include a copy with their tax return.

Foreign Account Disclosures

U.S. taxpayers with foreign financial accounts must comply with strict reporting requirements. The IRS and the Financial Crimes Enforcement Network (FinCEN) enforce these rules to prevent tax evasion.

One key requirement is the Foreign Bank Account Report (FBAR), which applies when the total value of a taxpayer’s foreign financial accounts exceeds $10,000 at any point during the year. This includes checking, savings, brokerage, and some retirement accounts held outside the U.S. The FBAR is filed separately from a tax return using FinCEN Form 114. Failure to submit it can result in fines—up to $10,000 per violation for non-willful failures and the greater of $100,000 or 50% of the account balance for willful violations.

Taxpayers with significant foreign assets may also need to file Form 8938 under the Foreign Account Tax Compliance Act (FATCA). This form is submitted with the annual tax return and applies to individuals with foreign assets exceeding $50,000 for single filers or $100,000 for married couples filing jointly, with higher thresholds for those living abroad. Unlike the FBAR, which focuses on account balances, Form 8938 includes a broader range of reportable assets, such as foreign stocks, partnership interests, and certain life insurance policies with cash value.

Completing the Document

Filling out Form 1040-B requires accuracy, as errors can lead to processing delays or IRS inquiries. The reported income must match financial statements, brokerage summaries, and other supporting documents.

Each section of the form must be completed carefully, especially when dealing with amortized income, accrued interest adjustments, or income subject to special tax treatment. Taxpayers receiving distributions from pass-through entities, such as partnerships or S corporations, must ensure their reported income matches the figures on Schedule K-1. Discrepancies can trigger IRS scrutiny, requiring explanations or amended filings.

Taxpayers should also account for applicable deductions or exclusions that may reduce taxable income. Investment-related expenses, such as brokerage fees or advisory costs, may be deductible if they qualify under IRS guidelines.

Keeping Supporting Records

Maintaining thorough documentation is necessary when filing Form 1040-B, as the IRS may request verification of reported income. Taxpayers should retain financial statements, brokerage reports, and bank records detailing income sources and amounts. These documents serve as proof in case of an audit or discrepancies with IRS records.

Investment income can be complex, particularly with capital distributions, reinvested dividends, or accrued interest. Taxpayers should keep records of purchase and sale transactions, including cost basis information, to ensure accurate reporting. If income is received from foreign accounts, additional documentation, such as account statements and foreign tax withholding records, should be preserved. The IRS generally recommends keeping tax records for at least three years, though longer retention may be necessary for foreign assets or nominee distributions.

Penalties for Misreporting

Failing to properly report income on Form 1040-B can result in financial penalties and increased IRS scrutiny. Underreporting taxable earnings may lead to accuracy-related penalties of 20% of the understated tax liability. In cases of willful misrepresentation, civil fraud penalties can reach 75% of the underpaid amount. Repeated noncompliance or intentional evasion may lead to criminal charges, including fines and potential imprisonment.

Late filing or failure to submit required disclosures, such as foreign account reports, can also trigger penalties. If the IRS determines that an omission was due to negligence, they may impose a failure-to-file penalty of 5% per month, up to a maximum of 25% of the unpaid tax. Interest accrues on unpaid balances, increasing the financial burden. To avoid these consequences, taxpayers should ensure all income is accurately reported and seek professional assistance if they are uncertain about filing requirements.