Generally, any interest that you receive or that is credited to your account and can be withdrawn is taxable income. Examples of taxable interest are interest on bank accounts, money market certificates, and deposited insurance dividends. Interest on veterans insurance dividends left on deposit with the Department of Veteran Affairs is not taxable. Interest on Series EE and Series I U.S. Savings bonds does not have to be reported until you redeem the bonds or they mature. Interest from these bonds may be excluded from income if you pay qualified higher educational expenses during the year and meet other requirements. Refer to Publication 550 (PDF), Investment Income and Expenses, for detailed information.

Certain distributions commonly referred to as dividends are actually interest. They include "dividends" on deposits or share accounts in cooperative banks, credit unions, domestic savings and loan associations, federal savings and loan associations, and mutual savings banks.

If you have a bond, note, or other long-term debt instrument that was originally issued for a lower price than its redemption price at maturity, part of the original issue discount may have to be included in your income each year as interest. Refer to Publication 550 or Publication 1212 (PDF) for more information on original issue discount.

You must show on your tax return the amount of any tax-exempt interest you received during the tax year. This is an information-reporting requirement only, and does not convert tax-exempt interest to taxable interest.

You should receive a Form 1099-INT (PDF), Interest Income; Form 1099-OID (PDF), Original Issue Discount, or a similar statement from each payer of interest of $10 or more, showing the taxable interest you must report. This information is often included on your year-end account statement. Even if you do not receive a statement, you are still responsible for reporting all taxable interest income.

If your taxable interest income is more than $400, be sure to show that income on Schedule B of Form 1040 (PDF), or on Schedule 1 of Form 1040A (PDF). You cannot file Form 1040EZ (PDF) if your interest income is more than $400. Even if your taxable interest income is $400 or less, you need to show that income on the front of Form 1040, 1040A, or Form 1040EZ.

If you received interest because you financed the sale of your home or other property, report it on Schedule B of Form 1040 or Schedule 1 of Form 1040A. If the buyer used the property as a personal residence, you must also show the buyer's name, address, and social security number.

You must use Form 1040 to report interest in some situations. For example, you cannot use Form 1040A or 1040EZ if you are reporting original issue discount in an amount that differs from the amount shown on Form 1099-OID, or if you received or paid accrued interest on a bond transferred between payment dates. You must use Form 1040 or Form 1040A if you received interest in your name as a nominee for the actual owner, or you received a Form 1099 for U.S. savings bond interest that includes amounts you reported before 2001.

If you received interest as a nominee for the actual owner, you need to show that amount separately, below a subtotal of all interest income listed on Schedule B of Form 1040 or Schedule 1 of Form 1040A. Follow the form instructions for nominees. You must prepare a Form 1099-INT for the interest that is not yours and give Copy B to the actual owner. You must also file a copy of the form and a completed Form 1096 (PDF), Annual Summary and Transmittal of U.S. Information Returns, with the Internal Revenue Service Center.

Excludable interest from redeemed U.S. savings bonds used to pay qualified higher education expenses is figured on Form 8815 (PDF) and then shown on Schedule B of Form 1040 or Schedule 1 of Form 1040A.

If you receive taxable interest, you may have to pay estimated tax. Refer to Tax Topic 355 for additional information on estimated tax.

You must give the payer of your interest income your correct social security number. If you do not, you may be subject to a penalty and to back-up withholding. Refer to Tax Topic 307 for information on back-up withholding.

For more information on interest income, order Publication 550.

Tax Topics & FAQs | 2001 Tax Year Archives | Tax Help Archives | Home