How to report interest income

Income can be obtained through capital investments in the form of capital gains, DIVIDENDSand interest. Every year, investors pay taxes on the interest income from bonds, mutual funds, certificates of deposit (CDs) and sight deposit accounts. Some types of interest are fully taxable, while others are partially taxable.

Key recommendations

Interest on bonds, mutual funds, CDs and demand deposits of $10 or more is taxable.
Taxable interest is taxed the same as ordinary income.
Payers must file Form 1099-INT and send a copy to the recipient by January 31 of each year.
Interest income must be documented on Schedule B of IRS Form 1040.

Types of interest income

Interest is a part of the lending and investment industry. Creditors charge borrowers interest for using their capital as debt, such as loans and mortgages. The money these lenders earn in interest is called interest income.

The investors deposit money into various investment vehicles to generate a return, usually in the form of interest. This is called interest income. The main types of interest income an investor can earn include:

How is interest taxed?

Ordinary taxable interest is taxed as ordinary income as a individual retirement account (IRA) or retirement plan distribution. Interest income is added to the taxpayer’s other regular income, such as salary or wages. This total income is used to calculate marginal tax rates.

This rule applies to interest that is fully taxable at all levels and to interest that is only federally taxable. Certain USA government obligations are taxable only at the federal level. Municipal obligation the interest is exempt from all taxation unless alternative minimum tax (AMT) applies.

Taxpayers may exclude interest income redeemed on Series EE and Series I bonds issued after 1989 when used to pay qualified higher education expenses if they meet additional requirements for the Education Savings Bond Program.

Marginal tax rates

The IRS sets tax rates annually based on inflation. When filing tax returns in 2024, taxpayers apply marginal rates from 2023. When filing tax returns in 2025, marginal tax rates for 2024 apply.

2024

37% on individual income over $609,350 or $731,200 for married couples filing jointly
35% on individual income over $243,725 or $487,450 for married couples filing jointly
32% for individual income over $191,950 or $383,900 for married couples filing jointly
24% for individual income over $100,525 or $201,050 for married couples filing jointly
22% on individual income over $47,150 or $94,300 for married couples filing jointly
12% on individual income over $11,600 or $23,200 for married couples filing jointly
10% for individual income less than $11,600 or $23,200 for married couples filing jointly

2025

37% for individual income over $626,350 or $751,600 for married couples filing jointly
35% for individual income over $250,525 or $501,050 for married couples filing jointly
32% on individual income over $197,300 or $394,600 for married couples filing jointly
24% for individual income over $103,350 or $206,700 for married couples filing jointly
22% on individual income over $48,475 or $96,950 for married couples filing jointly
12% on individual income over $11,925 or $23,850 for married couples filing jointly
10% for individual income less than $11,925 or $23,850 for married couples filing jointly

Form 1099-INT and Form 1099-OID

Any institution offering interest to an individual must send Form 1099-INT to all beneficiaries by January 31 of each year. Banks and investment firms must submit the form for interest over $10. This form shows the amount and type of interest paid during the year.

Form 1099-INT has several different boxes that list different types of interest income:

Box 1 (Interest income): The amount of ordinary interest paid on fully taxable instruments such as corporate bonds, mutual funds, CDs, and checking deposit accounts.
Box 2 (Early withdrawal penalty): The total amount of early withdrawal penalties on CDs or other securities you paid during the year. This amount is considered an over-the-line deduction on the 1040.
Box 3 (Interest on US Savings Bonds and Treasuries): This number goes on a different line on Schedule B because it is only federally taxable. The income in this box is separate from the income in box 1.
Box 4 (Federal Income Tax Withheld): The total amount of reserve retention on your interest income. Most interest payers must withhold tax at a rate of 24% if the investor does not offer them either Tax ID or Social Security Number (SSN) or provide an incorrect number. This number is added to the amount withheld from your employer on the 1040.
Box 5 (Investment expenses): The total amount of deductible expenses related to your investment income in a single class real estate mortgage investment pipeline (REMIC).

Box 6 (Foreign tax paid): Any tax on interest income paid in a foreign country. If the foreign country has a fiscal treaty with the United States, this tax is usually either a deduction or a tax credit.
Box 7 (Foreign country or US possession): The foreign entity to which the tax in Box 6 was paid.
Box 8 (tax-free interest): Any interest exempt from all levels of taxation for any reason, incl tax free dividends from mutual funds or others regulated investment companies. This figure is reported on line 2a of 1040.
Box 9 (Specified private activity bond interest): This box reflects tax-free interest which is subject to AMT. This amount is also included in box 8.

Taxpayers may also receive Form 1099-OID for taxable interest. Form 1099-OID reports the original emission reduction instruments; if a taxable bond or other debt instrument was issued at a discount, a portion of the original issue discount may be included each year as interest income. A Form 1099-OID is issued to taxpayers with taxable original issue deductions of $10 or more.

Taxpayers can also be named designated tax payees and receive a Form 1099 for interest in their name that belongs to someone else. The IRS has a set of instructions for reporting this income as part of Schedule B to Form 1040. You must also prepare a Form 1099 to submit to the IRS, unless the nomination came from a spouse.

Tax returns

An accountant or tax preparation program or software will enter all data from the forms (1099-INT, W2s and others) into Form 1040, the standard Internal Revenue Service (IRS) trains all individual taxpayers to file each year.

Investors can also report all interest income received for the year in Part 1a Appendix B: Interest and Ordinary Dividends from 1040. Any investor who receives a Form 1099-INT must be able to correctly transcribe the information on Schedule B of the tax return or IRS Form 1040.

Tax exempt income

Types of tax-exempt income include:

Interest earned on certain types of municipal bonds, such as bonds issued by state and local governments
Interest earned on certain U.S. savings bonds, such as Series EE and Series I bonds, is exempt from state and local income taxes.
Government bonds such as Series HH bonds and Treasury Inflation-Protected Securities (TIPS) may also be tax-exempt.
Interest earned on 529 plans is usually exempt from federal taxes.
Money held in retirement accounts such as traditional IRAs or 401(k)s are usually tax-free until the funds are withdrawn.

Taxpayers must report taxable and nontaxable income on their tax return, even if they have not received the appropriate 1099 forms.

Interest vs. dividends

Interest income is generally taxed as ordinary income and subject to the same tax rates as wages. Dividend incomesuch as qualified dividends, may be subject to long-term capital gain rates based on the taxpayer’s income level and length of holding.

Dividends are paid by a company income after tax. Interest is paid out of pre-tax income. Companies that pay dividends face double taxation: once on profits and again on the dividends they pay to shareholders. Alternatively, interest payments are tax deductible for companies and more favorable as they can be used to reduce tax liability.

Where is taxable interest reported to taxpayers?

Taxable interest appears on Form 1099-INT. Box 1 of the form shows the interest income earned from the issuer.

What is the tax rate on interest income?

The taxable rate of any interest income depends on the tax bracket or marginal tax rates in which a taxpayer falls. For a taxpayer in the 22% tax bracket, interest income is also taxed at this rate.

Do taxpayers have to report interest income from a personal loan?

From the borrower’s point of view, personal loans are considered debt and not taxable income, meaning borrowers do not have to report any interest to the IRS. However, if you are lending money to family or friends in the form of a personal loan, whatever the interest you earn is considered taxable income and must be reported to the IRS using Form 1099-INT.

conclusion

Investors save money to generate dividends, capital gains or interest. Regardless of the form it takes, it’s all considered income. Taxpayers must report it along with any other sources of income received during the tax year. Investors should look for Form 1099-INT from financial institutions or investment firms after the end of January. This form shows how much interest was earned and what will be reported to the IRS.