1099 Misc Box 8 Income

[DefenderCSW]

In 2021, I received a 1099 Misc with income in Box 8.  I also paid investment interest in 2021.  I noticed the amount of income in box 8 was not included on Form 4952 on line 4a.  I think it should be and am curious why it isn't.  Thanks for your help!

Kind regards,

Chris

[James-B]

Hi @DefenderCSW

Thank you for this question!  When you receive an amount in box 8, it represents Substitute Payments in Lieu of Dividends or Interest.  The result is you are receiving a payment in place of a dividend or interest, which is taxed at ordinary rates.  On the back of the 1099-Misc you will see instructions for box 8 that reads “Box 8. Shows substitute payments in lieu of dividends or tax-exempt interest received by your broker on your behalf as a result of a loan of your securities. Report on the “Other income” line of Schedule 1 (Form 1040).” 

I’ve found a related article for these types of transactions that I think you will find interesting and pasted it below.  It discusses how these types of payments come into being and the impact on your taxes.

What Is a Substitute Payment in Lieu of Dividends? | The Motley Fool

Thanks again and have a great day!

[DefenderCSW]

Hi @James-B ,

Thanks for the prompt reply - I appreciate it.  I understand why there is an amount in Box 8 of the 1099 and also where it gets reported on the 1040.  What I am curious about is why is the amount from box 8 of the 1099 not included in the amount shown on line 4a of form 4592?

Thanks again for the reply!

Kind regards,

Chris

[James-B]

Hi @DefenderCSW

Thank you again for the clarification!  When the income is loaned and repaid as an in-lieu payment, it is recharacterized as ordinary income, meaning it is no longer net investment related income.  It drops off the investment reporting and ends up being reported directly on Form 1040 as ordinary income.  As a result, it will no longer be reported on Form 4952 – Investment Interest Expense Deduction or line 4a – Net investment income, gross income from property held for investment.

Thanks again!

[DefenderCSW]

Hi @James-B ,

Thanks for the follow up!

Kind regards,

Chris

[xyzabc124]

This does not sound correct. The amount of "Substitute Payments in Lieu of Dividends or Interest" is shown in Form 8960 Line 7 "Other modifications to investment income" for Net Investment Income Tax (for tax payers with income requiring NIIT). Thus the "payment in lieu" is taxed as a investment income for purposes of NIIT (Form 8960).

However, for purposes of "Investment Interest Expense Deduction" Form 4952, line 4a does NOT include these "payments in lieu".

Thus a taxpayer has to pay 3.8% NIIT tax (if income applies) for their substitute payment, but they don't get to apply it for deduction purposes if they have investment expenses. This looks like a bug!

As you indicated, YES the substitute payment should be taxed at the ordinary income tax rate, however it is STILL investment income, and should be included in 4952

Can you please fix this!?

In my 2022 tax return, Form 4952 4a "Gross income for property" equals my Form 8960 Line 1 and 2 (taxable interest + ordinary dividends) but does not include my Form 8960 Line 7 (other modifications to investment income). Thus turbox DOES see this as "investment income"... it's NOT earned income.

[ThomasM125]

Although the IRS literature does not directly address the issue of whether the substitute payments in lieu of interest or dividends are considered investment income for net investment income tax purposes, it would seem that they would qualify as they are a substitute for interest and dividends that qualify. I'm not sure why they don't automatically populate on the 2021 form 4952, line 4(a), but you can manually enter them if you access the Form 4952 Investment Interest Expense Worksheet (on line 9) which is available in the desktop version of TurboTax.