Paying Taxes on Interest Received

How to Pay Taxes on Interest Received

Most of the interest you receive or that is credited to your  bank account and you can withdraw from your account without penalty is considered taxable income. Examples of taxable interest are interest on bank accounts, money market certificates, certificates of deposit (CDs) and deposited insurance dividends. However, interest on insurance dividends that remain deposited in the Department of Veterans Affairs is not taxable. Understanding what types of interest is taxable can have a major effect on your tax return.


Taxable Interest on Savings Bonds – Form 8815

Interest on savings bonds of the United States Series EE and Series I usually do not have to file until the bonds mature or are redeemed. The interest from these bonds issued after 1989 may be excluded from income if the bonds are used to pay qualified higher education expenses during the year and other requirements of the Education Savings Bond Program are met. Excluding interest on savings bonds redeemed U.S. used to pay qualified higher education expenses, are calculated in the Form 8815 , Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989(exclusion of bond interest U.S. Savings Series EE and Series I issued after 1989)  and is listed on Annex B of Form 1040 or 1040A. See Publication 550 , Investment Income and Expenses (income and investment expenses) for more detailed information.


Paying Taxes on Interest Received

Certain distributions commonly called dividends are actually interest. These include “dividends” on deposits or share accounts in cooperative banks, credit unions, domestic partnerships for construction loans, federal savings and loan associations and mutual savings banks. You should receive Copy B of Form 1099-INT Interest Income (Interest Income) of the payer of the dividends.You must report to the IRS all taxable interest received but did not receive Copy B of Form 1099-INT.


Taxing Original Issue Discount Bonds

If a bond, note or other debt instrument originally issued at a discount price, it is possible that a portion of the original issue discount has to be included in your income as interest each year. For more information on the original issue discount, see Publication 550 or Publication 1212 , Guide to Original Issue Discount (OID) Instruments (original issue discount).

Interest income derived from Treasury bills, notes and bonds is subject to federal income tax but is exempt from all state and local income taxes. However, interest on certain bonds used to finance government operations and issued by a state, the District of Columbia, or possession of the United States is not taxable at the federal level. Report the amount of all tax-exempt interest received during the tax year. This is a requirement for information purposes only and does not convert tax-exempt interest to taxable interest.


Receiving Form 1099-INT

You should receive a Form 1099-INT , Interest Income (interest income) or a similar report each paying interest of $ 10 or more, indicating the taxable or tax-exempt interest to be heard. You should receive a Form 1099-OID , Original Issue Discount (Discount for the original issue)  or a similar report each paying a taxable discount from the original issue of $ 10 or more, indicating the amount to be declared.

A nominee is someone who gets in his own name, or interest income that actually belong to someone else. Generally, if you receive a Form 1099 for amounts that actually belong to another person, is considered to you as “as a nominee recipient.” You may need to have to file a tax return to the IRS and provide the other owners a Form 1099. If you received interest as a person appointed by the true owner (ie, a nominee), you need to indicate that amount below the subtotal all stated interest income on Schedule B of Form 1040 or 1040A.


Filing Form 1099-OID

Follow the instructions on the form to the nominee. Must prepare a Form 1099-INT for interest that does not belong and give Copy B to the true owner. You must also submit to the Processing Center Internal Revenue Service, a copy of Form 1099-INT and a duly completed copy of Form 1096 ,Annual Summary and Transmittal of U.S. Information Returns (Annual Summary and transmittal of information returns in the United States). For additional information about these requirements, see the Instructions for Forms 1099-INT and 1099-OID.


Dividends that are actually interest

Certain distributions commonly called dividends are actually interest. You must report as interest so-called “dividends” on deposits or on share accounts in:

  • Cooperative banks,
  • Credit unions,
  • Domestic building and loan associations,
  • Domestic savings and loan associations,
  • Federal savings and loan associations, and
  • Mutual savings banks.

The “dividends” will be shown as interest income on Form 1099-INT.


Publication 550 from IRS on Taxable Interest

If you receive taxable interest, you may have to pay estimated taxes. For more information on interest income, see Publication 550.