Interest Income

Topic 403 - Interest Received

Most interest that you either receive or is credited to your account and that can be withdrawn without penalty is taxable income. Examples of taxable interest are interest on bank accounts, money market accounts, certificates of deposit, and deposited insurance dividends. Interest on insurance dividends left on deposit with the U.S. Department of Veterans Affairs, however, is not taxable. Interest on Series EE and Series I U.S. Savings Bonds generally does not have to be reported until the earlier of when the bonds mature or are redeemed. Interest from these bonds issued after 1989 may be excluded from income if used to pay for qualified higher educational expenses during the year and other requirements are met for the Educational Savings Bond Program. Excludable interest from redeemed U.S. savings bonds used to pay qualified higher education expenses is figured on Form 8815 (PDF), Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989, and shown on Form 1040A or 1040, Schedule B (PDF). Refer to Publication 550Investment Income and Expenses, for detailed information.

Certain distributions commonly referred to as dividends are actually 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. You should receive Copy B of Form 1099-INT (PDF), Interest Income, from the payer of these dividends. You must report to the IRS all taxable interest received even if you do not receive Copy B of Form 1099-INT.

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 1212Guide to Original Issue Discount (OID) Instruments for more information on original issue discount.

Interest income from Treasury bills, notes and bonds is subject to federal income tax, but is exempt from all state and local income taxes. However, 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. Report the amount of any tax-exempt interest received during the tax year. This is an information-reporting requirement only, and does not convert tax-exempt interest to taxable interest. Form 1099-INT (PDF) or a similar statement should be received from each payer of interest of $10 or more, showing the taxable or tax-exempt interest to be reported. Form 1099-OID (PDF), Original Issue Discount, or a similar statement should be received from each payer of taxable original issue discount of $10 or more, showing the amount to be reported.

A nominee is someone who receives, in his or her name, income or interest that actually belongs to another individual. Generally, if you receive a Form 1099 for amounts that actually belong to another person, you are considered a nominee recipient. It may be necessary for you to file with the IRS and furnish to the other owners a Form 1099. If you received interest as a nominee for the actual owner, you need to show that amount below a subtotal of all interest income listed on Schedule B of Form 1040 or Form 1040A. Follow the form instructions for nominees. You must prepare a Form 1099-INT (PDF) 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 Center. 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.

You must give the payer of your interest income your correct social security number. If you do not, you may be subject to a penalty and backup withholding. Refer to Topic 307 for information on backup withholding.

Gary Wilson, CPA​​​​​​​​​​​

Accounting and Tax Preparation                                                 

(614) 361-4760 * Westerville, Ohio 

We're here to make the accounting and tax preparation user friendly! ​​


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