How Is Interest Income Taxed and Reported?

Interest Is Taxed at Ordinary Income Tax Rates

A person sitting in front of a computer screen looking at a line graph, representing the headline and text: 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

The Balance / Julie Bang

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 exceeded $600 for the year, and even that minuscule amount that your home lease security deposit brought in. 

Is There Any Interest That's Not Taxable? 

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. Interest earned on Series EE and Series I savings bonds may also be excluded from taxes if it was used to pay for qualified higher education expenses.

Some municipal bonds are private activity bonds. Interest on those is safe from ordinary tax, but it's taxable for the alternative minimum tax (AMT).

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're a single taxpayer who earns more than $73,600 in 2021, or $75,900 in 2022. The tax year threshold for married taxpayers filing jointly is $114,600 for 2021 and $118,100 for tax year 2022.

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 2021 but if it's not credited to you until 2022 for some reason, you would report it on your 2022 return when you file in 2023.

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 in late 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 Form 1040. You would then enter the total from Schedule B on line 2b of your Form 1040. 
  • Tax-exempt municipal bond interest is reported on Line 2a of 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. 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.

Using and filing Schedule B is mandatory if you have over $1,500 in interest or dividends.

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, savings accounts, money market accounts, and some checking accounts. Interest income also refers to the income lenders receive from borrowers, which includes loans and mortgages.

Article Sources

  1. IRS. "Topic No. 403 Interest Received." Accessed Dec. 16, 2021.

  2. United States Senate Committee on Finance. "Repeal the Alternative Minimum Tax." Accessed Dec. 16, 2021.

  3. IRS. "IRS Provides Tax Inflation Adjustments for Tax Year 2022." Accessed Dec. 16, 2021.

  4. IRS. "About Form 1099-INT, Interest Income." Accessed Dec. 16, 2021.

  5. IRS. "Form 1099-INT." Accessed Dec. 16, 2021.

  6. IRS. "Form 1040." Accessed Dec. 16, 2021.

  7. IRS. "Form 6251: Alternative Minimum Tax—Individuals." Accessed Dec. 16, 2021.

  8. IRS. "About Schedule B (Form 1040), Interest and Ordinary Dividends." Accessed Dec. 16, 2021.

  9. IRS. "Questions and Answers on the Net Investment Income Tax." Accessed Dec. 16, 2021.