Interest Income
Table of Contents
Foreign-source income.&If you are a U.S. citizen with interest income from sources outside the United States (foreign income), you must report that
income on your tax return unless it is exempt by U.S. law. This is true whether you reside inside or outside the United States
and whether or not you receive a Form 1099 from the foreign payer.
Introduction
This chapter discusses the following topics.
Different types of interest income.
What interest is taxable and what interest is nontaxable.
When to report interest income.
How to report interest income on your tax return.
In general, any interest you receive or that is credited to your account and can be withdrawn is taxable income. Exceptions
to this rule are discussed later in this chapter.
You may be able to deduct expenses you have in earning this income on Schedule A (Form 1040) if you itemize your deductions.
See , later, and .
Useful Items - You may want to see:
Publication
Installment Sales
Investment Income and Expenses
Guide to Original Issue Discount (OID) Instruments
Form (and Instructions)
Schedule A (Form 1040)
Itemized Deductions
Schedule B (Form 1040A or 1040)
Interest and Ordinary Dividends
Tax for Certain Children Who Have Unearned Income
Parents' Election To Report Child's Interest and Dividends
Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989
Optional Form To Record Redemption of Series EE and I U.S. Savings Bonds Issued After 1989
General Information
A few items of general interest are covered here.
Recordkeeping. You should keep a list showing sources and interest amounts received during the year. Also, keep the forms you receive showing
your interest income (Forms 1099-INT, for example) as an important part of your records.
Tax on unearned income of certain children.
Part of a child's 2014 unearned income may be taxed at the parent's tax rate. If so, Form 8615, Tax for Certain Children Who
Have Unearned Income, must be completed and attached to the child's tax return. If not, Form 8615 is not required and the
child's income is taxed at his or her own tax rate.
&&Some parents can choose to include the child's interest and dividends on the parent's return. If you can, use Form 8814, Parents' Election To Report Child's Interest and Dividends, for this purpose.
&&For more information about the tax on unearned income of children and the parents' election, see .
Beneficiary of an estate or trust.
&&Interest you receive as a beneficiary of an estate or trust is generally taxable income. You should receive a Schedule
K-1 (Form 1041), Beneficiary's Share of Income, Deductions, Credits, etc., from the fiduciary. Your copy of Schedule K-1 (Form
1041) and its instructions will tell you where to report the income on your Form 1040.
Social security number (SSN).
&&You must give your name and SSN or individual tax identification number (ITIN) to any person required by federal tax
law to make a return, statement, or other document that relates to you. This includes payers of interest. If you do not give
your SSN or ITIN to the payer of interest, you may have to pay a penalty.
SSN for joint account.
&&If the funds in a joint account belong to one person, list that person's name first on the account and give that person's
SSN to the payer. (For information on who owns the funds in a joint account, see , later.) If the joint account contains combined funds, give the SSN of the person whose name is listed first on the account.
This is because only one name and SSN can be shown on Form 1099.
&&These rules apply both to joint ownership by a married couple and to joint ownership by other individuals. For example,
if you open a joint savings account with your child using funds belonging to the child, list the child's name first on the
account and give the child's SSN.
Custodian account for your child.
&&If your child is the actual owner of an account that is recorded in your name as custodian for the child, give the
child's SSN to the payer. For example, you must give your child's SSN to the payer of interest on an account owned by your
child, even though the interest is paid to you as custodian.
Penalty for failure to supply SSN.
&&If you do not give your SSN to the payer of interest, you may have to pay a penalty. See
under Penalties in chapter 1. Backup withholding also may apply.
Backup withholding.
&&Your interest income is generally not subject to regular withholding. However, it may be subject to backup withholding
to ensure that income tax is collected on the income. Under backup withholding, the payer of interest must withhold, as income
tax, on the amount you are paid, applying the appropriate withholding rate.
&&Backup withholding may also be required if the IRS has determined that you underreported your interest or dividend
income. For more information, see
in chapter 4.
Reporting backup withholding.
&&If backup withholding is deducted from your interest income, the payer must give you a Form 1099-INT for the year
indicating the amount withheld. The Form 1099-INT will show any backup withholding as “Federal income tax withheld.”
Joint accounts.
&&If two or more persons hold property (such as a savings account or bond) as joint tenants, tenants by the entirety,
or tenants in common, each person's share of any interest from the property is determined by local law.
Income from property given to a child.
&&Property you give as a parent to your child under the Model Gifts of Securities to Minors Act, the Uniform Gifts to
Minors Act, or any similar law becomes the child's property.
&&Income from the property is taxable to the child, except that any part used to satisfy a legal obligation to support
the child is taxable to the parent or guardian having that legal obligation.
Savings account with parent as trustee.
&&Interest income from a savings account opened for a minor child, but placed in the name and subject to the order of
the parents as trustees, is taxable to the child if, under the law of the state in which the child resides, both of the following
The savings account legally belongs to the child.
The parents are not legally permitted to use any of the funds to support the child.
Form 1099-INT.
&&Interest income is generally reported to you on Form 1099-INT, or a similar statement, by banks, savings and loans,
and other payers of interest. This form shows you the interest you received during the year. Keep this form for your records.
You do not have to attach it to your tax return.
&&Report on your tax return the total interest income you receive for the tax year. See the instructions to Form 1099-INT
to see whether you need to adjust any of the amounts reported to you.
Interest not reported on Form 1099-INT.
&&Even if you do not receive Form 1099-INT, you must still report all of your interest income. For example, you may
receive distributive shares of interest from partnerships or S corporations. This interest is reported to you on Schedule
K-1 (Form 1065), Partner's Share of Income, Deduction, Credits, etc., or Schedule K-1 (Form 1120S), Shareholder's Share of
Income, Deductions, Credits, etc.
&&Generally, if someone receives interest as a nominee for you, that person must give you a Form 1099-INT showing the
interest received on your behalf.
&&If you receive a Form 1099-INT that includes amounts belonging to another person, see the discussion on nominee distributions
under How To Report Interest Income in chapter 1 of Publication 550, or Schedule B (Form 1040A or 1040) instructions.
Incorrect amount.
&&If you receive a Form 1099-INT that shows an incorrect amount (or other incorrect information), you should ask the
issuer for a corrected form. The new Form 1099-INT you receive will be marked “Corrected.”
Form 1099-OID.
&&Reportable interest income also may be shown on Form 1099-OID, Original Issue Discount. For more information about
amounts shown on this form, see , later in this chapter.
Exempt-interest dividends.
&&Exempt-interest dividends you receive from a mutual fund or other regulated investment company, including those received
from a qualified fund of funds in any tax year beginning after December 22, 2010, are not included in your taxable income.
(However, see , next.) Exempt-interest dividends should be shown in box 10 of Form 1099-DIV. You do not reduce your basis for distributions
that are exempt-interest dividends.
Information reporting requirement.
&&Although exempt-interest dividends are not taxable, you must show them on your tax return if you have to file. This
is an information reporting requirement and does not change the exempt-interest dividends into taxable income.
Exempt interest on specified private activity bonds may be subject to the alternative minimum tax. See
in chapter 30 for more information. Chapter 1 of Publication 550 contains a discussion on private activity bonds under State or Local Government Obligations.
Interest on VA dividends.
&&Interest on insurance dividends left on deposit with the Department of Veterans Affairs (VA) is not taxable. This
includes interest paid on dividends on converted United States Government Life Insurance and on National Service Life Insurance
Individual retirement arrangements (IRAs).
&&Interest on a Roth IRA generally is not taxable. Interest on a traditional IRA is tax deferred. You generally do not
include it in your income until you make withdrawals from the IRA. See .
Taxable Interest
Taxable interest includes interest you receive from bank accounts, loans you make to others, and other sources. The following
are some sources of taxable interest.
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.
Money market funds.
&&Money market funds pay dividends and are offered by nonbank financial institutions, such as mutual funds and stock
brokerage houses. Generally, amounts you receive from money market funds should be reported as dividends, not as interest.
Certificates of deposit and other deferred interest accounts.
&&If you open any of these accounts, interest may be paid at fixed intervals of 1 year or less during the term of the
account. You generally must include this interest in your income when you actually receive it or are entitled to receive it
without paying a substantial penalty. The same is true for accounts that mature in 1 year or less and pay interest in a single
payment at maturity. If interest is deferred for more than 1 year, see , later.
Interest subject to penalty for early withdrawal.
&&If you withdraw funds from a deferred interest account before maturity, you may have to pay a penalty. You must report
the total amount of interest paid or credited to your account during the year, without subtracting the penalty. See Penalty on early withdrawal of savings in chapter 1 of Publication 550 for more information on how to report the interest and deduct the penalty.
Money borrowed to invest in certificate of deposit.
&&The interest you pay on money borrowed from a bank or savings institution to meet the minimum deposit required for
a certificate of deposit from the institution and the interest you earn on the certificate are two separate items. You must
report the total interest you earn on the certificate in your income. If you itemize deductions, you can deduct the interest
you pay as investment interest, up to the amount of your net investment income. See Interest Expenses in chapter 3 of Publication 550.
You deposited $5,000 with a bank and borrowed $5,000 from the bank to make up the $10,000 minimum deposit required to buy
a 6-month certificate of deposit. The certificate earned $575 at maturity in 2014, but you received only $265, which represented
the $575 you earned minus $310 interest charged on your $5,000 loan. The bank gives you a Form 1099-INT for 2014 showing the
$575 interest you earned. The bank also gives you a statement showing that you paid $310 interest for 2014. You must include
the $575 in your income. If you itemize your deductions on Schedule A (Form 1040), you can deduct $310, subject to the net
investment income limit.
Gift for opening account.
&&If you receive noncash gifts or services for making deposits or for opening an account in a savings institution, you
may have to report the value as interest.
&&For deposits of less than $5,000, gifts or services valued at more than $10 must be reported as interest. For deposits
of $5,000 or more, gifts or services valued at more than $20 must be reported as interest. The value is determined by the
cost to the financial institution.
You open a savings account at your local bank and deposit $800. The account earns $20 interest. You also receive a $15 calculator.
If no other interest is credited to your account during the year, the Form 1099-INT you receive will show $35 interest for
the year. You must report $35 interest income on your tax return.
Interest on insurance dividends.
&&Interest on insurance dividends left on deposit with an insurance company that can be withdrawn annually is taxable
to you in the year it is credited to your account. However, if you can withdraw it only on the anniversary date of the policy
(or other specified date), the interest is taxable in the year that date occurs.
Prepaid insurance premiums.
&&Any increase in the value of prepaid insurance premiums, advance premiums, or premium deposit funds is interest if
it is applied to the payment of premiums due on insurance policies or made available for you to withdraw.
U.S. obligations.
&&Interest on U.S. obligations, such as U.S. Treasury bills, notes, and bonds, issued by any agency or instrumentality
of the United States is taxable for federal income tax purposes.
Interest on tax refunds.
&&Interest you receive on tax refunds is taxable income.
Interest on condemnation award.
&&If the condemning authority pays you interest to compensate you for a delay in payment of an award, the interest is
Installment sale payments.
&&If a contract for the sale or exchange of property provides for deferred payments, it also usually provides for interest
payable with the deferred payments. That interest generally is taxable when you receive it. If little or no interest is provided
for in a deferred payment contract, part of each payment may be treated as interest. See Unstated Interest and Original Issue Discount in Publication 537, Installment Sales.
Interest on annuity contract.
&&Accumulated interest on an annuity contract you sell before its maturity date is taxable.
Usurious interest.
&&Usurious interest is interest charged at an illegal rate. This is taxable as interest unless state law automatically
changes it to a payment on the principal.
Interest income on frozen deposits.
&&Exclude from your gross income interest on frozen deposits. A deposit is frozen if, at the end of the year, you cannot
withdraw any part of the deposit because:
The financial institution is bankrupt or insolvent, or
The state where the institution is located has placed limits on withdrawals because other financial institutions in the state
are bankrupt or insolvent.
&&The amount of interest you must exclude is the interest that was credited on the frozen deposits minus the sum of:
The net amount you withdrew from these deposits during the year, and
The amount you could have withdrawn as of the end of the year (not reduced by any penalty for premature withdrawals of a time
If you receive a Form 1099-INT for interest income on deposits that were frozen at the end of 2014, see Frozen deposits under How To Report Interest Income in chapter 1 of Publication 550, for information about reporting this interest income exclusion on your tax return.
&&The interest you exclude is treated as credited to your account in the following year. You must include it in income
in the year you can withdraw it.
$100 of interest was credited on your frozen deposit during the year. You withdrew $80 but could not withdraw any more as
of the end of the year. You must include $80 in your income and exclude $20 from your income for the year. You must include
the $20 in your income for the year you can withdraw it.
Bonds traded flat.
&&If you buy a bond at a discount when interest has been defaulted or when the interest has accrued but has not been
paid, the transaction is described as trading a bond flat. The defaulted or unpaid interest is not income and is not taxable
as interest if paid later. When you receive a payment of that interest, it is a return of capital that reduces the remaining
cost basis of your bond. Interest that accrues after the date of purchase, however, is taxable interest income for the year
it is received or accrued. See , later, for more information.
Below-market loans.
&&In general, a below-market loan is a loan on which no interest is charged or on which interest is charged at a rate
below the applicable federal rate. See Below-Market Loans in chapter 1 of Publication 550 for more information.
U.S. Savings Bonds
This section provides tax information on U.S. savings bonds. It explains how to report the interest income on these bonds
and how to treat transfers of these bonds.
For other information on U.S. savings bonds, write to:&
For series EE and I paper savings bonds:&Series EE and Series I&Bureau of the Fiscal Service&Division of Customer Assistance&P.O. Box 7012&Parkersburg, WV &&For series EE and I electronic bonds:&Series EE and Series I&Bureau of the Fiscal Service&Division of Customer Assistance&P.O. Box 7015&Parkersburg, WV &&For series HH/H:&Series HH and Series H&Bureau of the Fiscal Service&Division of Customer Assistance&P.O. Box 2186&Parkersburg, WV
Or, on the Internet, visit:&.
Accrual method taxpayers.
&&If you use an accrual method of accounting, you must report interest on U.S. savings bonds each year as it accrues.
You cannot postpone reporting interest until you receive it or until the bonds mature. Accrual methods of accounting are explained
in chapter 1 under .
Cash method taxpayers.
&&If you use the cash method of accounting, as most individual taxpayers do, you generally report the interest on U.S.
savings bonds when you receive it. The cash method of accounting is explained in chapter 1 under . But see , later.
Series HH bonds.
&& These bonds were issued at face value. Interest is paid twice a year by direct deposit to your bank account. If you
are a cash method taxpayer, you must report interest on these bonds as income in the year you receive it.
&&Series HH bonds were first offered in 1980 and last offered in August 2004. Before 1980, series H bonds were issued.
Series H bonds are treated the same as series HH bonds. If you are a cash method taxpayer, you must report the interest when
you receive it.
&&Series H bonds have a maturity period of 30 years. Series HH bonds mature in 20 years. The last series H bonds matured
Series EE and series I bonds.
&&Interest on these bonds is payable when you redeem the bonds. The difference between the purchase price and the redemption
value is taxable interest.
Series EE bonds.
&&Series EE bonds were first offered in January 1980 and have a maturity period of 30 years.
&&Before July 1980, series E bonds were issued. The original 10-year maturity period of series E bonds has been extended
to 40 years for bonds issued before December 1965 and 30 years for bonds issued after November 1965. Paper series EE and series
E bonds are issued at a discount. The face value is payable to you at maturity. Electronic series EE bonds are issued at their
face value. The face value plus accrued interest is payable to you at maturity. As of January 1, 2012, paper savings bonds
were no longer sold at financial institutions.
&&Owners of paper series EE bonds can convert them to electronic bonds. These converted bonds do not retain the denomination
listed on the paper certificate but are posted at their purchase price (with accrued interest).
Series I bonds.
&&Series I bonds were first offered in 1998. These are inflation-indexed bonds issued at their face amount with a maturity
period of 30 years. The face value plus all accrued interest is payable to you at maturity.
Reporting options for cash method taxpayers.
&&If you use the cash method of reporting income, you can report the interest on series EE, series E, and series I bonds
in either of the following ways.
Method 1. Postpone reporting the interest until the earlier of the year you cash or dispose of the bonds or the year they mature. (However,
see , later.) &
Method 2. Choose to report the increase in redemption value as interest each year.
You must use the same method for all series EE, series E, and series I bonds you own. If you do not choose method 2 by reporting
the increase in redemption value as interest each year, you must use method 1.
If you plan to cash your bonds in the same year you will pay for higher education expenses, you may want to use method 1 because
you may be able to exclude the interest from your income. To learn how, see , later.
Change from method 1.
&&If you want to change your method of reporting the interest from method 1 to method 2, you can do so without permission
from the IRS. In the year of change you must report all interest accrued to date and not previously reported for all your
&&Once you choose to report the interest each year, you must continue to do so for all series EE, series E, and series
I bonds you own and for any you get later, unless you request permission to change, as explained next.
Change from method 2.
&&To change from method 2 to method 1, you must request permission from the IRS. Permission for the change is automatically
granted if you send the IRS a statement that meets all the following requirements.
You have typed or printed the following number at the top: “131.”
It includes your name and social security number under “131.”
It includes the year of change (both the beginning and ending dates).
It identifies the savings bonds for which you are requesting this change.
It includes your agreement to:
Report all interest on any bonds acquired during or after the year of change when the interest is realized upon disposition,
redemption, or final maturity, whichever is earliest, and
Report all interest on the bonds acquired before the year of change when the interest is realized upon disposition, redemption,
or final maturity, whichever is earliest, with the exception of the interest reported in prior tax years.
&&You must attach this statement to your tax return for the year of change, which you must file by the due date (including
extensions).
&&You can have an automatic extension of 6 months from the due date of your return for the year of change (excluding
extensions) to file the statement with an amended return. On the statement, type or print “Filed pursuant to section 301.9100-2.” To get this extension, you must have filed your original return for the year of the change by the due date (including extensions).
By the date you file the original statement with your return, you must also send a signed copy to the address below. &
Internal Revenue Service&Attention: CC:IT&A (Automatic Rulings Branch)&P.O. Box 7604&Benjamin Franklin Station&Washington, DC 20044
&&If you use a private delivery service, send the signed copy to the address below.&
Internal Revenue Service&Attention: CC:IT&A (Automatic Rulings Branch)&Room 5336&1111 Constitution Avenue, NW &Washington, DC 20224
&&Instead of filing this statement, you can request permission to change from method 2 to method 1 by filing Form 3115,
Application for Change in Accounting Method. In that case, follow the form instructions for an automatic change. No user fee is required.
Co-owners.
&&If a U.S. savings bond is issued in the names of co-owners, such as you and your child or you and your spouse, interest
on the bond is generally taxable to the co-owner who bought the bond.
One co-owner's funds used.
&& If you used your funds to buy the bond, you must pay the tax on the interest. This is true even if you let the other
co-owner redeem the bond and keep all the proceeds. Under these circumstances, the co-owner who redeemed the bond will receive
a Form 1099-INT at the time of redemption and must provide you with another Form 1099-INT showing the amount of interest from
the bond taxable to you. The co-owner who redeemed the bond is a “nominee.” See Nominee distributions under How To Report Interest Income in chapter 1 of Publication 550 for more information about how a person who is a nominee reports interest income belonging
to another person.
Both co-owners' funds used.
&&If you and the other co-owner each contribute part of the bond's purchase price, the interest is generally taxable
to each of you, in proportion to the amount each of you paid.
Community property.
&&If you and your spouse live in a community property state and hold bonds as community property, one-half of the interest
is considered received by each of you. If you file separate returns, each of you generally must report one-half of the bond
interest. For more information about community property, see Publication 555.
Table 7-1.
&&These rules are also shown in .
Ownership transferred.
&&If you bought series E, series EE, or series I bonds entirely with your own funds and had them reissued in your co-owner's
name or beneficiary's name alone, you must include in your gross income for the year of reissue all interest that you earned
on these bonds and have not previously reported. But, if the bonds were reissued in your name alone, you do not have to report
the interest accrued at that time.
&&This same rule applies when bonds (other than bonds held as community property) are transferred between spouses or
incident to divorce.
Purchased jointly.
&&If you and a co-owner each contributed funds to buy series E, series EE, or series I bonds jointly and later have
the bonds reissued in the co-owner's name alone, you must include in your gross income for the year of reissue your share
of all the interest earned on the bonds that you have not previously reported. The former co-owner does not have to include
in gross income at the time of reissue his or her share of the interest earned that was not reported before the transfer.
This interest, however, as well as all interest earned after the reissue, is income to the former co-owner.
&&This income-reporting rule also applies when the bonds are reissued in the name of your former co-owner and a new
co-owner. But the new co-owner will report only his or her share of the interest earned after the transfer.
&&If bonds that you and a co-owner bought jointly are reissued to each of you separately in the same proportion as your
contribution to the purchase price, neither you nor your co-owner has to report at that time the interest earned before the
bonds were reissued.
Table 7-1. Who Pays the Tax on U.S. Savings Bond Interest
Example 1.
You and your spouse each spent an equal amount to buy a $1,000 series EE savings bond. The bond was issued to you and your
spouse as co-owners. You both postpone reporting interest on the bond. You later have the bond reissued as two $500 bonds,
one in your name and one in your spouse's name. At that time neither you nor your spouse has to report the interest earned
to the date of reissue.
Example 2.
You bought a $1,000 series EE savings bond entirely with your own funds. The bond was issued to you and your spouse as co-owners.
You both postpone reporting interest on the bond. You later have the bond reissued as two $500 bonds, one in your name and
one in your spouse's name. You must report half the interest earned to the date of reissue.
Transfer to a trust.
&&If you own series E, series EE, or series I bonds and transfer them to a trust, giving up all rights of ownership,
you must include in your income for that year the interest earned to the date of transfer if you have not already reported
it. However, if you are considered the owner of the trust and if the increase in value both before and after the transfer
continues to be taxable to you, you can continue to defer reporting the interest earned each year. You must include the total
interest in your income in the year you cash or dispose of the bonds or the year the bonds finally mature, whichever is earlier.
&&The same rules apply to previously unreported interest on series EE or series E bonds if the transfer to a trust consisted
of series HH or series H bonds you acquired in a trade for the series EE or series E bonds. See , later.
Decedents.
&&The manner of reporting interest income on series E, series EE, or series I bonds, after the death of the owner (decedent),
depends on the accounting and income-reporting methods previously used by the decedent. This is explained in chapter 1 of
Publication 550.
Savings bonds traded.
&&If you postponed reporting the interest on your series EE or series E bonds, you did not recognize taxable income
when you traded the bonds for series HH or series H bonds, unless you received cash in the trade. (You cannot trade series
I bonds for series HH bonds. After August 31, 2004, you cannot trade any other series of bonds for series HH bonds.) Any cash
you received is income up to the amount of the interest earned on the bonds traded. When your series HH or series H bonds
mature, or if you dispose of them before maturity, you report as interest the difference between their redemption value and
your cost. Your cost is the sum of the amount you paid for the traded series EE or series E bonds plus any amount you had
to pay at the time of the trade.
You traded series EE bonds (on which you postponed reporting the interest) for $2,500 in series HH bonds and $223 in cash.
You reported the $223 as taxable income on your tax return. At the time of the trade, the series EE bonds had accrued interest
of $523 and a redemption value of $2,723. You hold the series HH bonds until maturity, when you receive $2,500. You must report
$300 as interest income in the year of maturity. This is the difference between their redemption value, $2,500, and your cost,
$2,200 (the amount you paid for the series EE bonds). (It is also the difference between the accrued interest of $523 on the
series EE bonds and the $223 cash received on the trade.)
Choice to report interest in year of trade.
&&You could have chosen to treat all of the previously unreported accrued interest on the series EE or series E bonds
traded for series HH bonds as income in the year of the trade. If you made this choice, it is treated as a change from method
Form 1099-INT for U.S. savings bonds interest.
&&When you cash a bond, the bank or other payer that redeems it must give you a Form 1099-INT if the interest part of
the payment you receive is $10 or more. Box 3 of your Form 1099-INT should show the interest as the difference between the
amount you received and the amount paid for the bond. However, your Form 1099-INT may show more interest than you have to
include on your income tax return. For example, this may happen if any of the following are true.
You chose to report the increase in the redemption value of the bond each year. The interest shown on your Form 1099-INT will
not be reduced by amounts previously included in income.
You received the bond from a decedent. The interest shown on your Form 1099-INT will not be reduced by any interest reported
by the decedent before death, or on the decedent's final return, or by the estate on the estate's income tax return.
Ownership of the bond was transferred. The interest shown on your Form 1099-INT will not be reduced by interest that accrued
before the transfer.
You were named as a co-owner, and the other co-owner contributed funds to buy the bond. The interest shown on your Form 1099-INT
will not be reduced by the amount you received as nominee for the other co-owner. (See , earlier in this chapter, for more information about the reporting requirements.)
You received the bond in a taxable distribution from a retirement or profit-sharing plan. The interest shown on your Form
1099-INT will not be reduced by the interest portion of the amount taxable as a distribution from the plan and not taxable
as interest. (This amount is generally shown on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., for the year
of distribution.)
&&For more information on including the correct amount of interest on your return, see , later. Publication 550 includes examples showing how to report these amounts.
Interest on U.S. savings bonds is exempt from state and local taxes. The Form 1099-INT you receive will indicate the amount
that is for U.S. savings bond interest in box 3.
Education Savings
Bond Program
You may be able to exclude from income all or part of the interest you receive on the redemption of qualified U.S. savings
bonds during the year if you pay qualified higher educational expenses during the same year. This exclusion is known as the
Education Savings Bond Program.
You do not qualify for this exclusion if your filing status is married filing separately.
Form 8815.
&&Use Form 8815 to figure your exclusion. Attach the form to your Form 1040 or Form 1040A.
Qualified U.S. savings bonds.
&&A qualified U.S. savings bond is a series EE bond issued after 1989 or a series I bond. The bond must be issued either
in your name (sole owner) or in your and your spouse's names (co-owners). You must be at least 24 years old before the bond's
issue date. For example, a bond bought by a parent and issued in the name of his or her child under age 24 does not qualify
for the exclusion by the parent or child.
The issue date of a bond may be earlier than the date the bond is purchased because the issue date assigned to a bond is the
first day of the month in which it is purchased.
Beneficiary.
&&You can designate any individual (including a child) as a beneficiary of the bond.
Verification by IRS.
&&If you claim the exclusion, the IRS will check it by using bond redemption information from the Department of the
Qualified expenses.
&&Qualified higher educational expenses are tuition and fees required for you, your spouse, or your dependent (for whom
you claim an exemption) to attend an eligible educational institution.
&&Qualified expenses include any contribution you make to a qualified tuition program or to a Coverdell education savings
&&Qualified expenses do not include expenses for room and board or for courses involving sports, games, or hobbies that
are not part of a degree or certificate granting program.
Eligible educational institutions.
&&These institutions include most public, private, and nonprofit universities, colleges, and vocational schools that
are accredited and eligible to participate in student aid programs run by the U.S. Department of Education.
Reduction for certain benefits.
&&You must reduce your qualified higher educational expenses by all of the following tax-free benefits.
Tax-free part of scholarships and fellowships (see
in chapter 12).
Expenses used to figure the tax-free portion of distributions from a Coverdell ESA.
Expenses used to figure the tax-free portion of distributions from a qualified tuition program.
Any tax-free payments (other than gifts or inheritances) received for educational expenses, such as:
Veterans' educational assistance benefits,
Qualified tuition reductions, or
Employer-provided educational assistance.
Any expense used in figuring the American Opportunity and lifetime learning credits.
Amount excludable.
&&If the total proceeds (interest and principal) from the qualified U.S. savings bonds you redeem during the year are
not more than your adjusted qualified higher educational expenses for the year, you may be able to exclude all of the interest.
If the proceeds are more than the expenses, you may be able to exclude only part of the interest.
&&To determine the excludable amount, multiply the interest part of the proceeds by a fraction. The numerator of the
fraction is the qualified higher educational expenses you paid during the year. The denominator of the fraction is the total
proceeds you received during the year.
In February 2014, Mark and Joan, a married couple, cashed qualified series EE U.S. savings bonds with a total denomination
of $10,000 that they bought in April 1998 for $5,000. They received proceeds of $8,396 representing principal of $5,000 and
interest of $3,396. In 2014, they paid $4,000 of their daughter's college tuition. They are not claiming an education credit
for that amount, and their daughter does not have any tax-free educational assistance. They can exclude $1,617 ($3,396 & ($4,000
& $8,396)) of interest in 2014. They must include the remaining $1,779 ($3,396 − $1,617) interest in gross income.
Modified adjusted gross income limit.
&&The interest exclusion is limited if your modified adjusted gross income (modified AGI) is:
$76,000 to $91,000 for taxpayers filing single or head of household, and
$113,950 to $143,950 for married taxpayers filing jointly or for a qualifying widow(er) with dependent child.
You do not qualify for the interest exclusion if your modified AGI is equal to or more than the upper limit for your filing
&&Modified AGI, for purposes of this exclusion, is adjusted gross income (Form 1040, line 37, or Form 1040A, line 21)
figured before the interest exclusion, and modified by adding back any:
Foreign earned income exclusion,
Foreign housing exclusion and deduction,
Exclusion of income for bona fide residents of American Samoa,
Exclusion for income from Puerto Rico,
Exclusion for adoption benefits received under an employer's adoption assistance program,
Deduction for tuition and fees,
Deduction for student loan interest, and
Deduction for domestic production activities.
&&Use the Line 9 Worksheet in the Form 8815 instructions to figure your modified AGI.
&&If you have investment interest expense incurred to earn royalties and other investment income, see Education Savings Bond Program in chapter 1 of Publication 550.
Recordkeeping.
If you claim the interest exclusion, you must keep a written record of the qualified U.S. savings bonds you redeem. Your
record must include the serial number, issue date, face value, and total redemption proceeds (principal and interest) of each
bond. You can use Form 8818 to record this information. You should also keep bills, receipts, canceled checks, or other documentation that shows
you paid qualified higher educational expenses during the year.
U.S. Treasury Bills, Notes, and Bonds
Treasury bills, notes, and bonds are direct debts (obligations) of the U.S. Government.
Taxation of interest.
&&Interest income from Treasury bills, notes, and bonds is subject to federal income tax but is exempt from all state
and local income taxes. You should receive Form 1099-INT showing the interest (in box 3) paid to you for the year.
&&Payments of principal and interest generally will be credited to your designated checking or savings account by direct
deposit through the TreasuryDirect& system.
Treasury bills.
&&These bills generally have a 4-week, 13-week, 26-week, or 52-week maturity period. They are generally issued at a
discount in the amount of $100 and multiples of $100. The difference between the discounted price you pay for the bills and
the face value you receive at maturity is interest income. Generally, you report this interest income when the bill is paid
at maturity. If you paid a premium for a bill (more than the face value), you generally report the premium as a section 171
deduction when the bill is paid at maturity.
Treasury notes and bonds.
&&Treasury notes have maturity periods of more than 1 year, ranging up to 10 years. Maturity periods for Treasury bonds
are longer than 10 years. Both generally are issued in denominations of $100 to $1 million and generally pay interest every
6 months. Generally, you report this interest for the year paid. For more information, see U.S. Treasury Bills, Notes, and Bonds in chapter 1 of Publication 550.
For other information on Treasury notes or bonds, write to:&
Bureau of the Fiscal Service&P.O. Box 7015&Parkersburg, WV
Or, on the Internet, visit: .
For information on series EE, series I, and series HH savings bonds, see , earlier.
Treasury inflation-protected securities (TIPS).
&&These securities pay interest twice a year at a fixed rate, based on a principal amount adjusted to take into account
inflation and deflation. For the tax treatment of these securities, see Inflation-Indexed Debt Instruments under Original Issue Discount (OID), in Publication 550.
Bonds Sold Between Interest Dates
If you sell a bond between interest payment dates, part of the sales price represents interest accrued to the date of sale.
You must report that part of the sales price as interest income for the year of sale.
If you buy a bond between interest payment dates, part of the purchase price represents interest accrued before the date of
purchase. When that interest is paid to you, treat it as a nontaxable return of your capital investment, rather than as interest
income. See Accrued interest on bonds under How To Report Interest Income in chapter 1 of Publication 550 for information on reporting the payment.
Life insurance proceeds paid to you as beneficiary of the insured person are usually not taxable. But if you receive the proceeds
in installments, you must usually report a part of each installment payment as interest income.
For more information about insurance proceeds received in installments, see Publication 525, Taxable and Nontaxable Income.
&&If you buy an annuity with life insurance proceeds, the annuity payments you receive are taxed as pension and annuity
income from a nonqualified plan, not as interest income. See
for information on pension and annuity income from nonqualified plans.
State or Local Government Obligations
Interest on a bond used to finance government operations generally is not taxable if the bond is issued by a state, the District of Columbia, a possession of the United States, or any of their political subdivisions.
Bonds issued after 1982 (including tribal economic development bonds issued after February 17, 2009) by an Indian tribal government
are treated as issued by a state. Interest on these bonds is generally tax exempt if the bonds are part of an issue of which
substantially all proceeds are to be used in the exercise of any essential government function.
For information on federally guaranteed bonds, mortgage revenue bonds, arbitrage bonds, private activity bonds, qualified
tax credit bonds, and Build America bonds, see State or Local Government Obligations in chapter 1 of Publication 550.
Information reporting requirement.
&&If you must file a tax return, you are required to show any tax-exempt interest you received on your return. This
is an information reporting requirement only. It does not change tax-exempt interest to taxable interest.
Original Issue Discount (OID)
Original issue discount (OID) is a form of interest. You generally include OID in your income as it accrues over the term
of the debt instrument, whether or not you receive any payments from the issuer.
A debt instrument generally has OID when the instrument is issued for a price that is less than its stated redemption price
at maturity. OID is the difference between the stated redemption price at maturity and the issue price.
All debt instruments that pay no interest before maturity are presumed to be issued at a discount. Zero coupon bonds are one
example of these instruments.
The OID accrual rules generally do not apply to short-term obligations (those with a fixed maturity date of 1 year or less
from date of issue). See Discount on Short-Term Obligations in chapter 1 of Publication 550.
De minimis OID.
&&You can treat the discount as zero if it is less than one-fourth of 1% (.0025) of the stated redemption price at maturity
multiplied by the number of full years from the date of original issue to maturity. This small discount is known as
“de minimis”
Example 1.
You bought a 10-year bond with a stated redemption price at maturity of $1,000, issued at $980 with OID of $20. One-fourth
of 1% of $1,000 (stated redemption price) times 10 (the number of full years from the date of original issue to maturity)
equals $25. Because the $20 discount is less than $25, the OID is treated as zero. (If you hold the bond at maturity, you
will recognize $20 ($1,000 − $980) of capital gain.)
Example 2.
The facts are the same as in Example 1, except that the bond was issued at $950. The OID is $50. Because the $50 discount is more than the $25 figured in Example 1, you must include the OID in income as it accrues over the term of the bond.
Debt instrument bought after original issue.
&&If you buy a debt instrument with de minimis OID at a premium, the discount is not includible in income. If you buy a debt instrument with de minimis OID at a discount, the discount is reported under the market discount rules. See Market Discount Bonds in chapter 1 of Publication 550.
Exceptions to reporting OID as current income.
&&The OID rules discussed in this chapter do not apply to the following debt instruments.
Tax-exempt obligations. (However, see Stripped tax-exempt obligations under Stripped Bonds and Coupons in chapter 1 of Publication 550).
U.S. savings bonds.
Short-term debt instruments (those with a fixed maturity date of not more than 1 year from the date of issue).
Obligations issued by an individual before March 2, 1984.
Loans between individuals if all the following are true.
The lender is not in the business of lending money.
The amount of the loan, plus the amount of any outstanding prior loans between the same individuals, is $10,000 or less.
Avoiding any federal tax is not one of the principal purposes of the loan.
Form 1099-OID.
&&The issuer of the debt instrument (or your broker if you held the instrument through a broker) should give you Form
1099-OID, or a similar statement, if the total OID for the calendar year is $10 or more. Form 1099-OID will show, in box 1,
the amount of OID for the part of the year that you held the bond. It also will show, in box 2, the stated interest you must
include in your income. Box 8 shows OID on a U.S. Treasury obligation for the part of the year you owned it and is not included
in box 1. A copy of Form 1099-OID will be sent to the IRS. Do not file your copy with your return. Keep it for your records.
&&In most cases, you must report the entire amount in boxes 1, 2, and 8 of Form 1099-OID as interest income. But see
later in this discussion, for more information.
Form 1099-OID not received.
&&If you had OID for the year but did not receive a Form 1099-OID, you may have to figure the correct amount of OID
to report on your return. See Publication 1212 for details on how to figure the correct OID.
&&If someone else is the holder of record (the registered owner) of an OID instrument belonging to you and receives
a Form 1099-OID on your behalf, that person must give you a Form 1099-OID.
Refiguring OID shown on Form 1099-OID.
&&You may need to refigure the OID shown in box 1 or box 8 of Form 1099-OID if either of the following apply.
You bought the debt instrument after its original issue and paid a premium or an acquisition premium.
The debt instrument is a stripped bond or a stripped coupon (including certain zero coupon instruments).
For information about figuring the correct amount of OID to include in your income, see Figuring OID on Long-Term Debt Instruments in Publication 1212 and the instructions for Form 1099-OID.
Refiguring periodic interest shown on Form 1099-OID.
&&If you disposed of a debt instrument or acquired it from another holder during the year, see , earlier, for information about the treatment of periodic interest that may be shown in box 2 of Form 1099-OID for that instrument.
Certificates of deposit (CDs).
&&If you buy a CD with a maturity of more than 1 year, you must include in income each year a part of the total interest
due and report it in the same manner as other OID.
&&This also applies to similar deposit arrangements with banks, building and loan associations, etc., including:
Time deposits,
Bonus plans,
Savings certificates,
Deferred income certificates,
Bonus savings certificates, and
Growth savings certificates.
Bearer CDs.
&&CDs issued after 1982 generally must be in registered form. Bearer CDs are CDs not in registered form. They are not
issued in the depositor's name and are transferable from one individual to another.
&&Banks must provide the IRS and the person redeeming a bearer CD with a Form 1099-INT.
More information.
&&See chapter 1 of Publication 550 for more information about OID and related topics, such as market discount bonds.
When To Report Interest Income
When to report your interest income depends on whether you use the cash method or an accrual method to report income.
Cash method.
&&Most individual taxpayers use the cash method. If you use this method, you generally report your interest income in
the year in which you actually or constructively receive it. However, there are special rules for reporting the discount on
certain debt instruments. See
and , earlier.
On September 1, 2012, you loaned another individual $2,000 at 12%, compounded annually. You are not in the business of lending
money. The note stated that principal and interest would be due on August 31, 2014. In 2014, you received $2,508.80 ($2,000
principal and $508.80 interest). If you use the cash method, you must include in income on your 2014 return the $508.80 interest
you received in that year.
Constructive receipt.
&&You constructively receive income when it is credited to your account or made available to you. You do not need to
have physical possession of it. For example, you are considered to receive interest, dividends, or other earnings on any deposit
or account in a bank, savings and loan, or similar financial institution, or interest on life insurance policy dividends left
to accumulate, when they are credited to your account and subject to your withdrawal. This is true even if they are not yet
entered in your passbook.
&&You constructively receive income on the deposit or account even if you must:
Make withdrawals in multiples of even amounts,
Give a notice to withdraw before making the withdrawal,
Withdraw all or part of the account to withdraw the earnings, or
Pay a penalty on early withdrawals, unless the interest you are to receive on an early withdrawal or redemption is substantially
less than the interest payable at maturity.
Accrual method.
&&If you use an accrual method, you report your interest income when you earn it, whether or not you have received it.
Interest is earned over the term of the debt instrument.
If, in the previous example, you use an accrual method, you must include the interest in your income as you earn it. You would
report the interest as follows: 2012, $80; 2013, $249.60; and 2014, $179.20.
Coupon bonds.
&&Interest on bearer bonds with detachable coupons is generally taxable in the year the coupon becomes due and payable.
It does not matter when you mail the coupon for payment.
How To Report Interest Income
Generally, you report all your taxable interest income on Form 1040, line 8a; Form 1040A, line 8a; or Form 1040EZ, line 2.
You cannot use Form 1040EZ if your taxable interest income is more than $1,500. Instead, you must use Form 1040A or Form 1040.
Form 1040A.
&&You must complete Schedule B (Form 1040A or 1040), Part I, if you file Form 1040A and any of the following are true.
Your taxable interest income is more than $1,500.
You are claiming the interest exclusion under the
(discussed earlier).
You received interest from a seller-financed mortgage, and the buyer used the property as a home.
You received a Form 1099-INT for U.S. savings bond interest that includes amounts you reported in a previous tax year.
You received, as a nominee, interest that actually belongs to someone else.
You received a Form 1099-INT for interest on frozen deposits.
You are reporting OID in an amount less than the amount shown on Form 1099-OID.
You received a Form 1099-INT for interest on a bond you bought between interest payment dates.
You acquired taxable bonds after 1987 and choose to reduce interest income from the bonds by any amortizable bond premium
(see Bond Premium Amortization in chapter 3 of Publication 550).
List each payer's name and the amount of interest income received from each payer on line 1. If you received a Form 1099-INT
or Form 1099-OID from a brokerage firm, list the brokerage firm as the payer.
&&You cannot use Form 1040A if you must use Form 1040, as described next.
Form 1040.
&&You must use Form 1040 instead of Form 1040A or Form 1040EZ if:
You forfeited interest income because of the early withdraw
You acquired taxable bonds after 1987, you choose to reduce interest income from the bonds by any amortizable bond premium,
and you are deducting the excess of bond premium amortization for the accrual period over the qualified stated interest for
the period (see Bond Premium Amortization in chapter 3 of Publication 550); or
You received tax-exempt interest from private activity bonds issued after August 7, 1986.
Schedule B (Form 1040A or 1040).
&&You must complete Schedule B (Form 1040A or 1040), Part I, if you file Form 1040 and any of the following apply.
Your taxable interest income is more than $1,500.
You are claiming the interest exclusion under the
(discussed earlier).
You received interest from a seller-financed mortgage, and the buyer used the property as a home.
You received a Form 1099-INT for U.S. savings bond interest that includes amounts you reported in a previous tax year.
You received, as a nominee, interest that actually belongs to someone else.
You received a Form 1099-INT for interest on frozen deposits.
You received a Form 1099-INT for interest on a bond you bought between interest payment dates.
You are reporting OID in an amount less than the amount shown on Form 1099-OID.
Statement (2) in the preceding list under Form 1040 is true.
In Part I, line 1, list each payer's name and the amount received from each. If you received a Form 1099-INT or Form 1099-OID
from a brokerage firm, list the brokerage firm as the payer.
Reporting tax-exempt interest.
&&Total your tax-exempt interest (such as interest or accrued OID on certain state and municipal bonds, including zero
coupon municipal bonds) reported on Form 1099-INT, box 8, and exempt-interest dividends from a mutual fund or other regulated
investment company reported on Form 1099-DIV, box 10. Add these amounts to any other tax-exempt interest you received. Report
the total on line 8b of Form 1040A or Form 1040.
&&If you file Form 1040EZ, enter “TEI” and the amount in the space to the left of line 2. Do not add tax-exempt interest in the total on Form 1040EZ, line 2.
&&Form 1099-INT, box 9, and Form 1099-DIV, box 11, show the tax-exempt interest subject to the alternative minimum tax
on Form 6251. These amounts are already included in the amounts on Form 1099-INT, box 8, and Form 1099-DIV, box 10. Do not
add the amounts in Form 1099-INT, box 9, and Form 1099-DIV, box 11, to, or subtract them from, the amounts on Form 1099-INT,
box 8, and Form 1099-DIV, box 10.
Do not report interest from an individual retirement account (IRA) as tax-exempt interest.
Form 1099-INT.
&&Your taxable interest income, except for interest from U.S. savings bonds and Treasury obligations, is shown in box
1 of Form 1099-INT. Add this amount to any other taxable interest income you received. See the instructions for Form 1099-INT
if you have interest from a security acquired at a premium. You must report all of your taxable interest income even if you
do not receive a Form 1099-INT. Contact your financial institution if you do not receive a Form 1099-INT by February 15. Your
identifying number may be truncated on any paper Form 1099-INT you receive.
&&If you forfeited interest income because of the early withdrawal of a time deposit, the deductible amount will be
shown on Form 1099-INT in box 2. See Penalty on early withdrawal of savings in chapter 1 of Publication 550.
&&Box 3 of Form 1099-INT shows the interest income you received from U.S. savings bonds, Treasury bills, Treasury notes,
and Treasury bonds. Generally, add the amount shown in box 3 to any other taxable interest income you received. If part of
the amount shown in box 3 was previously included in your interest income, see , later. If you acquired the security at a premium, see the instructions for Form 1099-INT.
&&Box 4 of Form 1099-INT will contain an amount if you were subject to backup withholding. Include the amount from box
4 on Form 1040EZ, line 7; Form 1040A, line 40; or Form 1040, line 64 (federal income tax withheld).
&&Box 5 of Form 1099-INT shows investment expenses you may be able to deduct as an itemized deduction. See
for more information about investment expenses.
&&If there are entries in boxes 6 and 7 of Form 1099-INT, you must file Form 1040. You may be able to take a credit
for the amount shown in box 6 unless you deduct this amount on line 8 of Schedule A (Form 1040). To take the credit, you may
have to file Form 1116, Foreign Tax Credit. For more information, see Publication 514, Foreign Tax Credit for Individuals.
&&For a covered security, if you made an election under section 1278(b) to include market discount in income as it accrues
and you notified your payer of the election, box 10 shows the market discount that accrued on the debt instrument during the
year while held by you. Report this amount on your income tax return as directed in the instructions for Form 1040 or 1040A.
&&For a covered security, box 11 shows the amount of premium amortization for the year, unless you notified the payer
in writing in accordance with Regulations section 1.6045-1(n)(5) that you did not want to amortize bond premium under section
171. If an amount is reported in this box, see the instructions for Form 1040 (Schedule B). If an amount is not reported in
this box for a covered security acquired at a premium, the payer has reported a net amount of interest in boxes 1, 3, 8, or
9, whichever is applicable. If the amount in this box is greater than the amount of interest paid on the covered security,
please see Regulations section 1.171-2(a)(4).
U.S. savings bond interest previously reported.
&&If you received a Form 1099-INT for U.S. savings bond interest, the form may show interest you do not have to report.
See , earlier.
&&On Schedule B (Form 1040A or 1040), Part I, line 1, report all the interest shown on your Form 1099-INT. Then follow
these steps.
Several lines above line 2, enter a subtotal of all interest listed on line 1.
Below the subtotal enter “U.S. Savings Bond Interest Previously Reported” and enter amounts previously reported or interest accrued before you received the bond.
Subtract these amounts from the subtotal and enter the result on line 2.
More information.
&&For more information about how to report interest income, see chapter 1 of Publication 550 or the instructions for
the form you must file.