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
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.
Non-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:
- Your filing status must not be married filing separately.
- The bond must have been issued after December 31, 1989 at a discount.
- The taxpayer, taxpayer's spouse, or dependent must incur tuition fees at a qualified higher education institute.
- The purchaser of the bonds must be the owner of the bonds (or the person's spouse).
- You must be at least 24 years old before the bond issue date.
This interest income exclusion phases out at higher income levels. For 2013 joint returns, the exclusion begins to phase out at AGI of $112,050, and is eliminated completely when AGI reaches $142,050. For all other 2013 returns, phase-out starts at $74,700 and is eliminated at $89,700.
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 these reasons:
- The financial institution is bankrupt or insolvent.
- The state in which the institution is located has placed limits on withdrawals due to other financial institutions becoming insolvent or bankrupt.
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 Schedule B.
For more information, see IRS Publication 550.