When you earn interest on various financial accounts or investments, it is generally considered taxable income. However, some types of interest may be tax-exempt. Knowing the difference can help you accurately report your earnings and avoid penalties.
Taxable Interest
Most interest you receive is taxable and must be reported on your federal income tax return. Common sources include:
Bank Accounts & Investments: Interest from savings accounts, money market accounts, certificates of deposit (CDs), and corporate bonds.
Treasury Securities: Interest from U.S. Treasury bills, notes, and bonds is subject to federal tax but exempt from state and local taxes.
Savings Bonds: Interest from Series EE and Series I bonds is taxable when redeemed or matured unless an exemption applies.
Other Interest Payments: Interest from delayed insurance claims, legal settlements, and similar sources may be taxable and reported on Form 1099-INT if $600 or more.
Nontaxable Interest
Some types of interest are not subject to federal income tax, including:
Educational Savings Bonds: Interest from Series EE and I bonds issued after 1989 may be tax-exempt if used for qualified education expenses.
Municipal Bonds: Interest on bonds issued by states, U.S. territories, or local governments is generally tax-exempt at the federal level.
Veterans' Insurance Dividends: Interest on insurance dividends left on deposit with the U.S. Department of Veterans Affairs is not taxable.
Original Issue Discount (OID)
If you purchase a bond or note at a discount, part of the discount may be considered taxable interest over time, even if you don’t receive payments each year. Form 1099-OID reports this amount.
Nominee Recipients
If you receive interest income that actually belongs to someone else, you are considered a nominee recipient. In this case:
Report the correct portion on your tax return.
Issue a Form 1099-INT or Form 1099-OID to the actual owner (unless it’s your spouse).
Reporting Requirements
If you receive $10 or more in interest, you should get a Form 1099-INT or 1099-OID. You must report all taxable and tax-exempt interest on your tax return, even if you do not receive these forms. Providing your correct taxpayer identification number to interest payers is essential to avoid penalties and backup withholding.