TAX questions regarding banking interest paid...?

Question

Hi,
I currently do not work, the only income I get is 'interest' paid to my 6 month CD account. I shouldn't say 'income' because I don't plan to withdraw the money (just leave it in there).

But I have two questions regarding taxes and I need some help:

Question 1:
How does one file for taxes in situations like this? I mean, the only thing I can report is the $240 earned...that's all I have for the year (or is it YTD income?). Can I do this with the1040EZ form instead -- rather than paying a tax guy to do the job and end up with negative cash flow?

Question 2:
If I transfered the account into someone else's name, do I have to pay taxes on the $240 earned -- even though the money isn't a withdraw?

I am asking all this because my bank (Washington Mutual) doesn't seem to know how to answer any of these questions...and my "soon to be fired" tax guy never answer calls nor return messages and is nowhere to be found except in the months of Feb-Apr.

Please help!

Answer 1

question 1
Based on what you have said you aren't required to file a return. See pub 501 table 1. Now if you had any kind of withholding you may still want to file a return.

Question 2
what you are descriping is calle nonimee intrest. The person to whom you are transfering it to will have to report it. They will be able to deduct it by filing Schedule B and naming you as the nonimee.

Answer 2

The $240 is taxable interest whether you withdraw it or just leave it in, but if that's your only income you are far below the limit where you have to file a tax return, so there would be no reason to file.

And why would you transfer the account into someone else's name? If you did though, any interest AFTER the transfer would be taxable income to them, anything BEFORE would be to you.

I suppose this is a real stupid question, but why do you have a tax guy if you don't have any income? And how do you live if you don't have any income? There seem to be a couple pieces missing here.

Answer 3

Interest on a bank deposit is income whether or not it is withdrawn. This applies even to income on a multi-year CD that cannot be withdrawn because the CD has not matured. This does not apply to certain special types of accounts, such as IRA's. The only other possible exception is when it cannot be withdrawn due to insolvency of the bank.

If your total taxable income is only $240, you should be able to file 1040EZ unless there is a special reason (based on facts not in your question) that you cannot. For example, for 2006 returns, person born on or before January 1, 1942 (in other words, those age 65 or older on January 1, 2007), could not use form 1040EZ.

Also, if your total taxable income is only $240 for the year, you are probably not required to file or pay federal income tax (you may be required to file or pay state income tax). The first several hundred to several thousand dollars (depending on filing status, etc.) of gross income per person per year is not taxed by the federal government. For example, for 2006 returns, anyone with no more than $850 in income (and many persons with more income) was neither required to file nor required to pay federal income taxes, except that persons in the following situations were required to file, were not allowed to file 1040EZ, and may have been required to pay federal income taxes:
• You received any advance earned income credit payments from your employer. These payments are shown in box 9 of your Form W-2. (Obviously not applicable because you have no employer.)
• You owe tax from the recapture of an education credit (see Form 8863). (Probably not applicable; did you ever receive an education credit in the past?)
• You claim a credit for excess social security and tier 1 RRTA tax withheld. (Not applicable because you had no job and therefore no social security and tier 1 RRTA tax withheld.)
• You owe any special taxes, such as social security and Medicare tax on tips you did not report to your employer. (Not applicable because you did not work)
• You owe uncollected social security and Medicare or RRTA tax on tips you reported to your employer or on your group-term life insurance. (Not applicable because you did not work)
• You had net earnings from self-employment of at least $400. (Not applicable because you said you had no income other than from the bank)
• You had wages of $108.28 or more from a church or qualified church-controlled organization that is exempt from employer social security and Medicare taxes. (Not applicable because you said you had no income other than from the bank)
• You owe tax on a qualified plan, including an individual retirement arrangement (IRA), or other tax-favored account.

Changing the name on the account will not affect your tax obligations with respect to the money that has already been earned. Whether it is withdrawn, stays in your name, or is put in someone else's name ONLY matters if the account is an IRA, 401K, ESA, etc. Otherwise, you became obligated with respect to that money when it was earned.

Answer 4

If the interest is paid on your account, it would be reportable on your income tax return provided you had enough income to require filing.

Answer 5

You are not required to file. For a Single non-dependent, you don't need to file if your income in 2007 is less than $8,750.
For a Single Dependent, the limit is $850.

Answer 6

Any taxpayer receiving interest income is required
to file. However, you will not owe taxes. x-irs