In general, any interest you receive through an account credit
or other means is taxable income. This includes interest on bank
accounts, money market accounts, and deposited insurance dividends.
Dividends paid on deposits or share accounts in cooperative banks,
credit unions, domestic savings and loan institutions, federal
savings and loan associations, and mutual savings banks are also
considered taxable interest income.
For most types of interest income over $10, you should receive a
Form 1099-INT from the payer of the interest. Even if you do not
receive this form, it is still your responsibility to report the
income on your tax return.
Interest income is reported on Schedule B. If your taxable
interest is less than $1,500, you may report the interest directly
on your Form 1040, Form 1040A, or Form 1040-EZ.
Original Issue Discount (OID) is the excess or
deficiency of the stated redemption price over the issue price of a
debt instrument. Generally, at the time a debt instrument (such as
a bond) is purchased, the original issue is the amount you pay to
purchase the instrument. The payments you receive, whether yearly
or all at once, that are in excess of the original purchase price,
are taxable interest income.
Series EE U.S. Savings Bond interest can be
nontaxable interest income if the redemption of the bond is used to
pay qualified higher education expenses. The IRS will verify the
eligibility of your claim with the bond redemption information
given by the Department of Treasury. To qualify, all the following
must be true:
This interest income exclusion phases out at higher income
levels. For 2012 joint returns, the exclusion begins to phase out
at AGI of $109,250, and is eliminated completely when AGI reaches
$139,250. For all other 2012 returns, phase-out starts at $72,850
and is eliminated at $87,850.
Nominee interest is interest you receive on behalf of the real
owner of the investment that produced interest income. You must
report the amount of interest you received on Schedule B, but you
will also report that the interest does not belong to you and you
will not pay tax on the amount. You must give the real owner a Form
1099-INT and that person will pay tax on the interest income.
Frozen deposits are interest amounts that are accrued during the
tax year but are not available for you to withdraw for either of
You do not report this type of interest until the funds become
available to you.
State and local government payments to the holder of a state or
local government obligation, such as municipal bonds, are generally
exempt from federal income tax. Although you may not have to pay
tax on the interest earned, you still must report the interest on
For more information, see IRS