Interest Income: How It's Taxed and Reported
Interest Is Taxed at Ordinary Income Tax Rates
Even if it seems like a small amount, any of the interest that you earn during the year isn't tax-free. It's income, subject to the sme, ordinary income tax rates as the rest of your income.
Sources of interest income include the obvious, such as what you earned on that money you put aside in a bank or money market account, as well as on a few not-so-obvious sources: bonds, loans you made to others and even that miniscule amount your home lease security deposit brought in.
Some Notable Exceptions
Interest on U.S. Treasury bonds and savings bonds is taxable on your federal return, but it's usually tax-free at the state level. And interest on municipal bonds is tax-free at the federal level. Municipal bond interest is also often tax-free at the state level if you invest in a bond that's issued in the same state in which you reside.
Some municipal bonds are private activity bonds. Interest on these is safe from ordinary tax, but it's taxable for the alternative minimum tax. The AMT has been around since 1969. It's an "extra" tax imposed by the IRS to prevent wealthy taxpayers from taking advantage of so many credits and deductions that they effectively avoid paying any taxes at all.
The AMT isn't something you'd have to worry about unless you earn more than $70,300 as a single taxpayer in 2018, up significantly from $54,300 in the 2017 tax year after being reworked due to the Tax Cuts and Jobs Act of 2017. The threshold increases to $109,400 for married taxpayers filing jointly but drops to $54,700 for married taxpayers filing separately.
Deferring Interest Income
Interest income becomes taxable when it's actually paid to you, assuming you use the cash method of accounting, which the vast majority of taxpayers do. It might accrue in 2016 but if it's not credited to you until 2017 for some reason, you would report it on your 2017 return.
There are also some ways to defer interest income to a future tax year. Some banks and credit unions will pay interest at the maturity of a certificate of deposit, also called a time deposit, typically on maturities under one year. You can also defer reporting interest on U.S. savings bonds until the savings bond matures or is redeemed.
Form 1099-INT and Interest Income
Interest income is reported by banks and other financial institutions on Form 1099-INT, a copy of which is then sent to you and to the IRS. You'll receive a 1099-INT from each institution that paid you $10 or more in interest during the year. Check Box 1 of any 1099-INT forms you receive. Taxable interest is reported there.
Interest from U.S. savings bonds and treasury notes and bonds is reported in Box 3 of Form 1099-INT. Municipal bond interest is reported in Box 8. The portion of municipal bond interest that's generated from private activity bonds is reported in Box 9.
Reporting Your Interest Income
Now, where do you enter all this on your tax return? You'll report interest income in the following places:
- Taxable interest goes on Line 8a of Form 1040, on Line 8a of Form 1040-A, or Line 2 of Form 1040-EZ.
- Tax-exempt municipal bond interest is reported on Line 8b of Form 1040 or Line 8b of Form 1040-A.
- Private activity bond interest is reported on Line 12 of Form 6251 as an adjustment for calculating the alternative minimum tax.
Using Schedule B
Schedule B is a supplemental tax form used to tally up interest and dividend income if you receive it from multiple sources. Using and filing Schedule B is mandatory if you have over $1,500 in interest and/or dividends. But even if you're not required to file the schedule, you can still use it to total your interest and dividend incomes so you can report them on your Form 1040.