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Interest Income

How Interest is Taxed and Reported on Your Tax Return

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Interest income is earned on deposits at banks and credit unions, on money market funds, on bonds, and on loans, such as seller-financed mortgages. Interest is taxed as ordinary income, subject to the ordinary income tax rates.

Interest on US Treasury bonds and savings bonds are taxable on your federal return, but are tax-free at the state level.

Interest on municipal bonds are tax-free at the federal level. Municipal bond interest are tax-free at the state level if you invest in a bond issued in the same state in which you reside. Some municipal bonds are private activity bonds. Interest on private activity bonds is tax-free for the regular tax, but is taxable for the alternative minimum tax.

Deferring Interest Income

Generally speaking, interest income becomes taxable when actually paid. However there are some opportunities to defer interest income to a future tax year. Some banks and credit unions will pay interest at the maturity of a certificate of deposit (also called a time deposit), typically on maturities under one year. You can also defer reporting interest on US savings bonds until the savings bond matures or is redeemed.

Reporting Interest Income

Interest income is reported by the bank or other financial institution using Form 1099-INT. The bank, broker or financial institution will send you a 1099-INT if they paid $10 or more of interest to you during the year. Taxable interest is reported in Box 1 of Form 1099-INT. Treasury interest from US savings bonds and Treasury notes and bonds are reported in Box 3 of Form 1099-INT. Municipal bond interest is reported in Box 8 of Form 1099-INT. The portion of municipal bond interest that is generated from private activity bonds is reported in Box 9 of Form 1099-INT.

You'll report interest income on your tax return in the following places:

  • Taxable interest goes on Line 8a of Form 1040 (or Line 8a of Form 1040-A, or Line 2 of Form 1040-EZ).
  • Tax-exempt municipal bond interest is reported on Line 8b of Form 1040 (or Line 8b of Form 1040-A) Private activity bond interest is reported on Line 12 of Form 6251, as an adjustment for calculating the Alternative Minimum Tax.

Using Schedule B

Schedule B is a supplemental tax form used to tally up interest and dividend income from multiple sources. Using Schedule B is required if you have over $1,500 in interest and/or dividends. Even if you are not required to file Schedule B, you can utilize the form to tally up your interest and dividends for reporting on your Form 1040.
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