How Is Interest Income Taxed and Reported?

Interest Is Taxed at Ordinary Income Tax Rates

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It might seem like just a small amount, a handful of dollars here and there, but any interest income that you earn during the year is taxable all the same. The IRS says it's income, subject to the same ordinary income tax rates as most other money you might receive during the tax year.

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 if the interest you charged exceeds $600 for the year, and even that minuscule amount that your home lease security deposit brought in. 

There Are Some 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 this works in reverse as well—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 where 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 $71,700 as a single taxpayer in 2019, and this increases to $72,900 in 2020. The threshold increases to $111,700 for married taxpayers filing jointly in 2019, increasing to $113,400 in 2020, but it drops to $55,850 and $56,700 for married taxpayers who file separately in 2019 and 2020. 

In What Year Is Interest Taxable?

Interest income becomes taxable when it's actually paid to you, assuming you use the cash method of accounting, and the vast majority of taxpayers do. It might accrue in 2019 but if it's not credited to you until 2020 for some reason, you would report it on your 2020 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, usually late in January.

Look at 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 

You'll report interest income in different places when it comes time to file your tax return, depending on the type of interest you earned.

  • Taxable interest goes on Schedule B of the 2019 Form 1040, "Interest and Ordinary Dividends." You would then enter the total from Schedule B on line 10b of your Form 1040. 
  • Tax-exempt municipal bond interest is reported on Line 2a of the 2019 Form 1040.
  • Private activity bond interest is reported on Line 2g of Form 6251 as an adjustment for calculating the alternative minimum tax.

These lines and schedules are accurate for tax year 2019, the return you'll file in 2020. They might be different from the 2018 Form 1040 because the IRS made changes to that return in late 2019.

About Schedule B

Schedule B is a supplemental tax form used to tally up interest and dividend income, particularly 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. You can also use the schedule to total your interest and dividend incomes so you can report them on your Form 1040, even if you're not required to file it.

Tax laws change periodically and the above information might not reflect the most recent changes. Please consult with a tax professional for the most up-to-date advice. The information contained in this article is not intended as tax advice and it is not a substitute for tax advice.

Article Sources

  1. Internal Revenue Service. "Topic No. 403 Interest Received," Accessed Dec. 2, 2019.

  2. Internal Revenue Service. "IRS Provides Tax Inflation Adjustments for Tax Year 2020," Accessed Dec. 2, 2019.

  3. Internal Revenue Service. "Form 1099-INT," Accessed Dec. 2, 2019.