Most interest that you either receive or is credited to your account and that you can withdraw without penalty is taxable income in the year it becomes available to you. In addition, some interest you receive may be tax-exempt. You should receive Copy B of Form 1099-INT (PDF) or Form 1099-OID (PDF) with respect to payments of interest of $10 or more, showing the taxable or reportable tax-exempt interest. You must include in income on your federal income tax return all interest received that is taxable, even if you do not receive Copy B of Form 1099-INT or 1099-OID. You must give the payer of your interest income your correct taxpayer identification number. If you do not, you may be subject to a penalty and backup withholding. Refer to Topic 307 for information on backup withholding.
Examples of taxable interest include:
- Interest on bank accounts, money market accounts, certificates of deposit, and deposited insurance dividends. You should also be aware that certain distributions, commonly referred to as dividends, are actually taxable interest. They include dividends on deposits or on share accounts in cooperative banks, credit unions, domestic building and loan associations, domestic federal savings and loan associations, and mutual savings banks.
- Interest income from Treasury bills, notes and bonds, which is subject to federal income tax, but is exempt from all state and local income taxes.
- Savings Bond interest; however, unless you elect to include the interest in income each year, you generally will not report interest on Series EE and Series I U.S. Savings Bonds until the earlier of when the bonds mature or when they are redeemed or disposed of. However, see below for an exclusion from income if certain Series EE and Series I bonds are used to pay certain qualified higher education expenses during the same year and you meet other requirements.
However, some interest is nontaxable or may be excluded from income. For example:
- Interest redeemed from Series EE and Series I bonds issued after 1989 may be excluded from income if used to pay for qualified higher educational expenses during the year and you meet other requirements for the Educational Savings Bond Program. You figure this excludable interest on Form 8815 (PDF), Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989, and show it on Form 1040A or 1040, Schedule B (PDF), Interest and Ordinary Dividends. Refer to Publication 550, Investment Income and Expenses, for detailed information.
- Interest on some bonds used to finance government operations and issued by a state, the District of Columbia, or a U.S. possession is not taxable at the federal level but you must report it as tax-exempt interest received during the tax year. This is an information-reporting requirement only that does not convert tax-exempt interest to taxable interest.
- Interest on insurance dividends left on deposit with the U.S. Department of Veterans Affairs is nontaxable interest.
If a bond, note or other debt instrument was originally issued at a discount, part of the original issue discount may have to be included in income each year as interest. Refer to Publication 550 or Publication 1212, Guide to Original Issue Discount (OID) Instruments for more information on original issue discount. You should receive a Form 1099-OID (PDF), Original Issue Discount, or a similar statement from each payer of taxable original issue discount of $10 or more, showing the amount you should report.
There are times when you may receive a Form 1099 for interest in your name that actually belongs to someone else. In this case, the IRS considers you a nominee recipient and it may be necessary for you to file with the IRS and furnish to the other owners a Form 1099-INT. If you are a nominee recipient for the actual owner, see the instructions on Schedule B of Form 1040 or Form 1040A for how to report the interest on your income tax return. You must then prepare a Form 1099-INT (PDF), Interest Income, for the interest that is not yours and give Copy B to the actual owner. You must also file a copy of the 1099-INT and a completed Form 1096 (PDF), Annual Summary and Transmittal of U.S. Information Returns, with the Internal Revenue Service. For more information on these requirements, refer to the Form 1099-INT and 1099-OID Instructions (PDF).
If you receive taxable interest, you may have to pay estimated tax. For more information on interest income, refer to Publication 550.
Page Last Reviewed or Updated: January 28, 2015