Topic Number 403 - Interest Received
Most interest that you receive or that is credited to an account that you can withdraw without penalty is taxable income in the year it becomes available to you. However, some interest you receive may be tax-exempt. You should receive Copy B of Form 1099-INT.pdf or Form 1099-OID.pdf reporting payments of interest and/or tax-exempt interest of $10 or more. You may receive these forms as part of a composite statement from a broker. You must report all taxable and tax-exempt interest on your federal income tax return, even if you don't receive a Form 1099-INT or Form 1099-OID. You must give the payer of interest income your correct taxpayer identification number; otherwise, you may be subject to a penalty and backup withholding. Refer to Topic No. 307 for information on backup withholding. See the paragraph below with respect to original issue discount (OID), which is treated as interest for federal tax purposes.
Examples of Taxable Interest
- Interest on bank accounts, money market accounts, certificates of deposit, corporate bonds and deposited insurance dividends - 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 - This interest is subject to federal income tax, but is exempt from all state and local income taxes.
- Savings Bond interest - You can elect to include the interest in income each year, but you generally won't include interest on Series EE and Series I U.S. Savings Bonds until the earlier of when the bonds mature or when they're redeemed or disposed of. See the first bullet below for information about an exclusion from income for interest redeemed from certain Series EE and Series I bonds if you meet certain requirements.
- Other interest - Other interest paid to you by a business will be reported to you on Form 1099-INT if it is $600 or more. Examples include interest received with damages or delayed death benefits.
Examples of Nontaxable or Excludable Interest
- Interest redeemed from Series EE and Series I bonds issued after 1989 may be excluded from income when used to pay for qualified higher educational expenses during the year and you meet the other requirements for the Educational Savings Bond Program. Figure the amount of 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 1040, Schedule B.pdf, Interest and Ordinary Dividends. Refer to Publication 550.pdf, 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 reportable but not taxable at the federal level. Reporting tax-exempt interest received during the tax year is an information-reporting requirement only and doesn't convert tax-exempt interest into taxable interest.
- Interest on insurance dividends left on deposit with the U.S. Department of Veterans Affairs is nontaxable interest and not reportable.
Original Issue Discount Instruments
If a taxable 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, even if no payment is received during the year. Refer to Publication 550.pdf 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 in income. For a tax-exempt bond, you should receive a Form 1099-OID, or a similar statement, of tax-exempt OID that is reportable as tax-exempt interest.
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. If you received a Form 1099-INT or Form 1099-OID that includes an amount you received as a nominee for the real owner:
- See "Nominees" in the Form 1040, Schedule B Instructions for how to report the interest on your income tax return.
- You must then prepare a Form 1099-INT or Form 1099-OID for the interest (or OID) that's not yours unless that interest (or OID) belongs to your spouse. Send Copy A of the 1099-INT or Form 1099-OID and a completed Form 1096.pdf, Annual Summary and Transmittal of U.S. Information Returns to the Internal Revenue Service and give Copy B to the actual owner. For more information on these requirements, refer to the Form 1099-INT and 1099-OID Instructions.
If you receive taxable interest, you may have to pay estimated tax on the additional income. For more information, see Estimated Taxes and Am I Required to Make Estimated Tax Payments? For more information on interest income, refer to Publication 550.pdf.