Nominee Interest

If two or more people are listed as owners on a bank account or another type of investment account, the associated 1099-INT form (reporting interest income on the investment) will generally be sent to the person whose Social Security number is listed first on the account. The bank will report to the IRS that all income on the account was paid to that person. However, tax on the income should actually be split among all owners of the account, according to their proportionate ownership interest (which is determined under state law, but generally reflects the proportions that each person originally contributed to the account).

If you received a 1099-INT form that includes interest that is actually owed to someone else (for example, another joint owner of the account who is not your spouse), you can avoid tax on the full amount if you give the actual owner a Form 1099-INT by the end of January, and file a copy of this form with the IRS along with IRS Form 1096, Annual Summary and Transmittal of U.S. Information Returns, by the end of February.

In that case, you would report on Line 1 of Schedule B the full amount shown on the 1099-INT you received; after you list all your taxable interest items, subtract the amount of interest you reported to the other owners and label it "nominee distribution." Then show the result (total interest minus nominee distribution) on Line 2.