Interest bearing accounts can help you add a little bit extra to your savings. However, if you are able to withdraw the funds without any type of penalty, then you should be aware that interest paid to those funds is considered taxable income for the year you made it available. Interest will be reported on a Form 1099-INT or a 1099-OID, and you will be responsible for transcribing the information onto your return. All taxable interest must be reported, whether or not you receive documentation from the payer.
Examples of taxable interest:
- Interest on savings bonds. You can include the interest each year of the bond, in which case you won’t have to report the interest once the bond has matured.
- Treasury notes that accrue interest, even if they are exempt from state or local taxes, as they are still subject to federal taxes.
- Bank accounts, money market accounts, certificates of deposit and insurance dividends that have accrued interest. Typically, dividend distributions are taxable and include share accounts from cooperative banks, credit unions, domestic building and loan associations, domestic federal savings and loan associations, and mutual savings bank accounts.
You don’t have to include non-taxable interest as part of your gross income. Exceptions apply in certain situations, which may make taxable interest not required for income inclusion:
- Any interest from a Series EE or Series I bonds issued after 1989 and used to pay for higher education that meets the requirements of the Educational Savings Bond Program. Calculate the excluded interest using Form 8815 and then use Form 1040A to report it.
- Interest on bonds, issued by a state, the District of Columbia or a U.S. Territory, which you purchased to finance government operations. However, you need to report the interest throughout the year as tax-exempt income.
- Interest on Dividends from the U.S. Department of Veterans Affairs
If you received any notes or bonds at a discount, tax rules say you may have to include the interest each year in relation to the discount.
In some situations, you may be considered a nominee recipient of someone else’s interest. If that occurs, you’ll need to contact the IRS and ensure the original owner of the interest has been issued a Form 1099-INT. You are required to report nominee interest on your Form 1040 at tax time. Your tax preparer can help you in filing appropriate nominee interest paperwork and ensure its accuracy.