It’s my annual “Taxes from A to Z” series! For the series, I’ll focus on terms that you might see on your tax forms and statements but not necessarily in the headlines. If you’re wondering whether you can claim wardrobe expenses or whether to deduct a capital loss, this is one series you won’t want to miss.
N is for Nominee.
There are times when, for convenience or other legitimate reasons, securities or other properties might be transferred into the name of a third party even though there might be a different legal owner. When that happens, the person or entity that holds the property is called a nominee.
A nominee typically holds property on behalf of the actual owner for convenience (to make buying and selling shares easier). Some brokerage firms do this on a regular basis, putting your property into “street name” – that’s also a fancy way of saying nominee since the property is held in the name of the brokerage firm or third party and not the name of the real owner.
This kind of arrangement can cause some confusion at tax time if not reported correctly. If you have securities or other property held by a third party as nominee, the third party would receive interest or other income properly attributable to you. Chances are, that income would be reported to the nominee. The nominee must then issue you a form 1099 (most likely a form 1099-INT or 1099-DIV, the actual form depends on the kind of income) showing the interest or other income received on your behalf.
What if you’re the nominee? If you receive a form 1099 that includes income that you received while acting as a nominee for the real owner, you’ll report the full amount shown on the form 1099 on your Schedule B (remember, the IRS will be matching forms). Then, you’ll note on Schedule B the amount actually belonging to another person as a “Nominee Distribution.” Subtract that amount from the total – the amount that you’ll report as a bottom line should reflect the income that actually belongs to you.
But you’re not done yet. If you received income as a nominee, you must also file a form 1099 for that income with the IRS (just as a brokerage firm or other nominee would have to do). In this case, you’ll be listed as the payer, not the recipient.
A nominee reporting issue doesn’t always involve property that is fully transferred to a third party. You might run into this kind of arrangement, for example, with a joint savings account that pays interest. Both your name and the name of the joint owner might appear on the account but if only your Social Security Number was reported to the bank, the bank would issue a form 1099 showing all income as payable to you – even if you didn’t receive all of the income. In that case, the IRS wants you to issue a form 1099 by the due date (more on due dates here) to the joint owner of the account. The same rules would apply when you sold assets or liquidated your account (check out IRS Pub 550 for more info).
Remember, however, we’re talking about a legal nominee, not an informal arrangement where you’ve promised income or assets to another person. Reporting can be tricky with nominee accounts. If you’re still not sure how to report income or issue a form 1099, be sure to consult with your tax professional.
