Most interest income is taxable as ordinary income on your federal tax return, and is therefore subject to ordinary income tax rates. There are a few exceptions, however.
Generally speaking, most interest is considered taxable at the time you receive it or can withdraw it.
Interest taxed as ordinary income
Typically, most interest is taxed at the same federal tax rate as your earned income, including:
- Interest on deposit accounts, such as checking and savings accounts.
- Interest on the value of gifts given for opening an account.
- Distributions commonly known as “dividends” on deposit or share accounts in credit unions, cooperative banks, and other banking associations.
- Interest on loans you make to others.
- Interest on certificates of deposit (CDs).
- Interest on U.S. obligations (except municipal bonds; U.S. Treasury bonds are federally taxable but not at the state level).
- Interest on insurance dividends or increased value in prepaid insurance premiums you withdraw.
- Interest on an annuity contract.
- Original issue discount (OID) amounts on long-term debt instruments.
- Interest on income tax refunds.
Distributions from money market funds are typically reported as dividends, not interest.
Interest that may be exempt from federal income tax
- Municipal bond interest (may also be exempt from state tax if issued in your state of residence)
- Private activity bonds (under the regular tax system, but may be taxable under the alternative minimum tax [AMT])
- Exempt-interest dividends from a mutual fund or other regulated investment company
Deferred interest income
If you hold any fixed-income instruments to maturity, you can report the interest when it is paid upon maturity. With some U.S. savings bonds and in certain other cases, you may wish to use the accrual method, where you report the interest as it accrues, even if you do not receive it, rather than using the more common cash method.
OID amounts should be reported as they accrue.
You do not need to report interest earned on tax-deferred accounts, such as Traditional IRAs or 401(k)s, until you withdraw the earnings.
Reporting interest income on your tax return
Taxable and tax-exempt interest is reported on Form 1099-INT, part of your consolidated tax reporting statement from Fidelity. Even if you do not receive Form 1099-INT from other sources, you must report any taxable interest income on your tax return.
1099-OID reports any taxable OID and is also included in your Fidelity tax reporting statement; be sure to add these amounts to your taxable interest.
You should report tax-exempt and taxable interest on your income tax return (lines 2a and 2b of the 1040). You may also be required to file Schedule B, if your taxable income is more than $1,500 or under certain other conditions (see the form instructions).
If you are required to file Form 6251 for alternative minimum tax, you should report private activity bond interest there.
These are the most common scenarios for interest reporting on your federal income tax return; consult your tax advisor for your specific situation.
FAQs
Schedule B is an IRS tax form that must be completed if a taxpayer receives interest income and/or ordinary dividends over the course of the year of more than $1,500. The schedule must accompany a taxpayer's Form 1040. Taxpayers use information from Forms 1099-INT and 1099-DIV to complete Schedule B.
What happens if you don't report interest income? ›
If you receive a Form 1099-INT and do not report the interest on your tax return, the IRS will likely send you a CP2000, Underreported Income notice. This IRS notice will propose additional tax, penalties and interest on your interest payments and any other unreported income.
How to avoid paying taxes on interest income? ›
Strategies to avoid paying taxes on your savings
- Leverage tax-advantaged accounts. Tax-advantaged accounts like the Roth IRA can provide an avenue for tax-free growth on qualified withdrawals. ...
- Optimize tax deductions. ...
- Focus on strategic timing of withdrawals. ...
- Consider diversifying with tax-efficient investments.
The Interest Income page and related detail pages provide a summary of interest earned on government and corporate debt obligations and short-term certificates of deposit, as well as interest earned from cash awaiting reinvestment in a Fidelity Brokerage account.
Do I have to report interest income less than $1500? ›
Reporting interest income on your tax return
You should report tax-exempt and taxable interest on your income tax return (lines 2a and 2b of the 1040). You may also be required to file Schedule B, if your taxable income is more than $1,500 or under certain other conditions (see the form instructions).
What is the minimum reportable interest income for IRS? ›
You should receive a Form 1099-INT Interest Income from banks and financial institutions if you earned more than $10 in interest for the year.
Will I get audited if I forgot a 1099-INT? ›
Remember that an audit is not a certainty just because of a missing 1099. The IRS receives a lot of information and only audits a small percentage of tax returns each year. However, it's still important to correct your tax filing.
Do I have to report $1 of interest income? ›
Yes, that is correct, you don't report the 1099-Int with amount under $1 in your return. Just keep it for your records.
What kind of interest income is not taxable? ›
All interest income is taxable unless specifically excluded. tax-exempt interest income — interest income that is not subject to income tax. Tax-exempt interest income is earned from bonds issued by states, cities, or counties and the District of Columbia.
How much tax will I pay on interest income? ›
Interest income and ordinary dividends (qualified dividends are taxed at capital gains rates) are taxed at the same rate as your ordinary income tax. For example, if your federal income tax rate is 22%, your interest income or dividends will also be taxed at 22%.
Key Takeaways
Interest on bonds, mutual funds, CDs, and demand deposits of $10 or more is taxable. Taxable interest is taxed just like ordinary income. Payors must file Form 1099-INT and send a copy to the recipient by January 31 each year. Interest income must be documented on Schedule B of IRS Form 1040.
Does interest income count as earned income? ›
Interest income is considered unearned income.
What is the 4% rule for Fidelity? ›
Withdraw too much and you risk running out of money. Withdraw too little and you may not live the life you want to in retirement. Our guideline is to limit withdrawals to 4% to 5% of your initial retirement savings,4 then keep increasing this withdrawal based on inflation.
Do you have to pay taxes on Fidelity investments? ›
For any time during the year you bought or sold shares in a mutual fund, you must report the transaction on your tax return and pay tax on any gains and dividends.
How do you explain interest income? ›
Interest is the charge for the use of borrowed money. Interest income is income earned through depositing money in savings programs, buying certificates of deposit (CDs) or bonds, or lending your money.
What is the taxable interest income threshold? ›
Even if your financial institution doesn't send you a 1099-INT form because you earn less than $10 worth of interest, you'll have to report that income because it's still taxable. Taxpayers earning more than $1,500 in interest or ordinary dividends must also fill out Schedule B (Form 1040).
Is there a cap on tax interest? ›
You can deduct the mortgage interest you paid during the tax year on the first $750,000 of your mortgage debt for your primary home or a second home. If you are married filing separately, the limit drops to $375,000.
Do I need to report my 1099-INT on my return? ›
1099-INT filing requirements
When you file your taxes, you don't need to attach copies of the 1099-INT forms you receive, but you do need to report the information from the forms on your tax return.
Does interest income count as taxable income? ›
All interest income is taxable unless specifically excluded.
