How Is Interest Income Taxed and Reported?

Interest Is Taxed at Ordinary Income Tax Rates

Quick Facts: Filing Taxes for Interest Income. No matter how insignificant the amount may seem, any interest income that you earn during the year is taxable. Sources of interest income may include money in a bank account, bonds, and loans you made to others if the interest charged exceeds $600. Exceptions do exist, like for U.S. Treasury and savings bonds, depending on whether they're at the federal or state level. Report it on Schedule B of Form 1040 if you have multiple sources of interest or if you have more than $1,500 in interest or dividends

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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 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. 

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 $72,900 as a single taxpayer in 2020. The threshold for married taxpayers filing jointly is $113,400, and $56,700 for those filing separately.

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 when you file in 2021.

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 2020 Form 1040. 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 2020 Form 1040.
  • Private activity bond interest is reported on Line 2g of Form 6251 as an adjustment for calculating the alternative minimum tax.

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 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.

Frequently Asked Questions (FAQs)

How is interest income taxed?

Interest income doesn't have a special tax rate. Instead, it's taxed as part of your ordinary income. Some taxpayers are also subject to the Net Investment Income Tax. This is a 3.8% tax that applies to individuals who have net investment income and a modified adjusted gross income over $200,000 for single filers and $250,000 for those married filing jointly.

What is interest income?

Interest income refers to the earnings generated by savings and investments. Financial vehicles that generate interest include CDs, bonds, checking accounts, and savings accounts. Interest income also refers to the income lenders receive from borrowers, which includes loans and mortgages.