Posted by LLOYD J CAZES CPA

Interest Income and Taxes

Interest Income and Taxes

Although it may seem little, the interest you earn during the year is not tax-free. The interest is subject to the same tax rates as the rest of the income.

Sources of interest income include apparent sources, such as the use of money saved on a bank or money market account and some less visible sources such as bonds and loans you have made to other people, and even that, the small amount of your home lease security deposit brought in. 

Some notable exceptions

Interest on US Treasury bonds and savings bonds are subject to federal tax but are generally tax-free at the state level. And the interest on municipal bonds is exempt from federal taxes. If you invest in bonds issued in the same condition that you live in, interest on municipal bonds is generally tax-free at the state level.

Some municipal titles are private activity bonds. The interest related to them is protected by the ordinary tax but is subject to the alternative minimum tax. The AMT has been in existence since 1969. It is an "extra" tax imposed by the IRS to prevent wealthy taxpayers from receiving so many credits and deductions to avoid paying their taxes.

The AMT is not a problem unless you earn more than $ 71,700 as a single taxpayer in 2019. The limit is $ 111,700 for married taxpayers who have a joint return but fall to $ 55,850 for married taxpayers filing separately.

Interest taxed as ordinary income

Generally, most interest is taxed at the same federal tax rate as earned income, which includes:

  • Interest on deposit accounts, such as current and savings accounts.
  • Interest on the value of gifts offered to open an account.
  • Distributions called "dividends" on deposit accounts or shares in credit unions, cooperative banks, and other banking associations.
  • Interest on loans to third parties.
  • Interest on certificates of deposit (CDs).
  • Interest on US bonds (excluding municipal bonds, US Treasury bonds are subject to federal but not state-level taxes).
    • Interest on insurance dividends or increase in the number of prepaid insurance premiums withdrawn.
    • Interest on an annuity contract.
    • The reduction amounts of the first issue on long-term debt securities.
    • Interest on tax refunds.

Interest that may be exempt from federal income tax

    • Interest on municipal bonds (they may also be let off from state taxes if issued in your state of residence)
    • Securities for private activities (under the standard tax system, but may be subject to tax under the alternative minimum tax )
    • Dividends from interest-free of a mutual fund or other regulated investment firms

Deferred interest income

If the fixed income instruments remain due, you can declare an interest when they are paid at maturity. With some US savings bonds and in other cases, you can use the skilled method, which accounts for accrued interest, even if you do not receive it, rather than using the most common payment method.

Form 1099-INT and interest income

Banks and other financial institutions report interest income on Form 1099-INT. A copy is sent to the user and the IRS. You will receive a 1099-INT from each institution that paid $10 or more in interest during the year. Checkbox 1 on any 1099-INT form you receive. Taxable interest is declared there.

Interest on US savings bonds and treasury bills and bonds are also shown in Table 3 of Form 1099-INT. Interest on municipal bonds is shown in Table 8. The share of interest for municipal bonds generated by bonds for private assets is shown in Table 9 of Form 1099-INT.

Report on interest income on the tax return

Taxable and non-taxable interest is reported on Form 1099-INT, which forms part of the Consolidated Income Tax Return. Even if you do not receive Form 1099-INT from other sources, you must report interest expense on the tax return.

1099-OID reports any taxable OID and is also included in the tax return; add these amounts to your taxable interest.

Use of Schedule B

Schedule B is an additional tax form used to calculate interest and dividend income if received from multiple sources. The use and submission of Schedule B are necessary if you have more than $ 1,500 in interest and dividends. However, even if you do not have to submit the program, you can still use it to summarize your interest and dividends so you can report it on Form 1040.

LLOYD J CAZES CPA
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