Interest income is any amount paid by banks, investment houses, mutual fund companies, and financial institutions to account holders who deposit money into savings accounts, investments, and other interest-paying ventures. The interest paid is considered taxable income and must be reported to the IRS on annual tax returns every year. The interest-paying entity must file a 1099-INT on any interest over $10 paid during the year. The form must be reported to the IRS and sent to each interest recipient by January 31 each year.
The amounts and types of interest will impact which tax form is to be used. Taxpayers who receive over $1,500 of taxable interest must list all of their payers on Part 1 of Schedule B on Form 1040. Form 1099-INT will always report interest paid as cash-basis income; this means that income that is owed but not yet paid cannot be reported on this form.
Line 2a Tax-Exempt Interest
Tax-exempt interest is interest income that is not subject to federal income tax. In some cases, the amount of tax-exempt interest a taxpayer earns can limit the taxpayer’s qualification for certain other tax breaks. The most common sources of tax-exempt interest come from municipal bonds or income-producing assets inside of Roth retirement accounts.
Line 2b Taxable Interest
Each payer should send you a Form 1099-INT or Form 1099-OID. Enter your total taxable interest income on line 2b. But you must fill in and attach Schedule B if the total is over $1,500 or any of the other conditions listed at the beginning of the Schedule B instructions applies to you.
This form shows the amount and type of interest paid during the year. The 1099-INT form has several different boxes that list various types of interest income. The following is a brief list of the kind of income reported in each box:
⦁ Box 1 reports the total taxable interest income paid to you for the year. Bank accounts, CDs, and interest bearing checking and brokerage accounts, all qualify. As long as you earned at least $10 in taxable interest you’re supposed to get a 1099-INT reporting it. Even if you didn’t, you still need to report it despite not getting a 1099 for it.
⦁ Box 2 shows any early withdrawal penalty from an investment like a CD. For example, should you withdrawal money from a CD before it matures, the bank hits you with a penalty. That amount is deducted from your income.
⦁ Box 3 covers interest earned from U.S. government bonds, specifically savings bonds and Treasury notes, bills, and bonds. This isn’t included with the taxable income in Box 1 even though it gets hit by federal income tax. Instead, it may be tax exempt at the state or local level depending on where you live.
⦁ Box 4 – 7
The next four boxes cover expenses and withheld taxes on any interest you earn. There are times when federal and foreign taxes are automatically taken out of earned interest.
Federal tax withheld is reported in Box 4. This makes sure you don’t pay federal taxes again, since it was already taken out. It goes toward your taxes owed or adds to your refund.
Box 5 covers investment expenses. But it’s not the typical investment expenses you’d think of. Instead, it refers to real estate mortgage investment conduits (REMIC) which is a pool of mortgages.
Foreign taxes withheld are reported in Box 6 followed by the foreign country in Box 7. Many foreign taxes can be deducted from income or go towards a refund.
⦁ Box 8 – 9
Box 8 reports tax-exempt interest from investments like municipal bonds. This amount is exempt from federal income tax. This does not include tax exempt dividends from mutual funds which is now reported on 1099-DIV.
Specified private activity bond interest is reported in Box 9. This is the amount in Box 8 which is subject to the Alternative Minimum Tax.
⦁ Box 10 – 12
The next three boxes deal with buying individual bonds. There are two ways to do this: directly from the issuer or on a secondary market. A secondary bond market is an exchange where investors can buy and sell bonds.
This can create unique opportunities, but the accounting can get messy. Which is one reason bond funds are popular. As credit risk and interest rates change, bonds can be bought or sold at a discount or premium to par value.
Box 10 reports market discount. A bond bought at a discount leads to a profit at maturity. That profit can be taxed at maturity (or when it’s sold) or it can spread out over the life of the bond or however long you own it. You need to tell your broker beforehand whether you elect to accrue the discount annually over the life of the bond. That annual accrual amount is reported here.
Box 11 is the bond premium. A bond bought at a premium leads to a loss at maturity. That loss can be taken at maturity or it can be spread out over the life of the bond. When the loss is amortized in this way, that amount is reported here.
Box 12 lists the tax exempt bonds that paid interest income by CUSIP number.
⦁ Box 13 – 15
The last three boxes report state income tax information. The state is reported in Box 13, followed by the payer’s state ID number in Box 14, and the amount of State tax withheld in Box 15. Like federal tax withheld, this amount goes toward any state taxes you owe or could result in a state tax refund.