Which Interest Income Is Taxable?
Interest is generally taxable once it’s credited to an account you can withdraw from without penalty. The table below shows how common types of interest are treated at the federal level.
| Type of interest | Federal income tax | What to know |
|---|---|---|
| Bank accounts, money market accounts and CDs | Taxable | Usually reported on Form 1099-INT |
| Credit union “dividends” on share accounts | Taxable | Counted as interest, despite the name |
| Corporate bonds | Taxable | Reported in the year you receive it |
| Interest on insurance dividends left on deposit | Taxable | Counted as taxable interest |
| Interest on a delayed tax refund | Taxable | May be reported on Form 1099-INT |
| U.S. Treasury bills, notes and bonds | Taxable | Exempt from all state and local income taxes |
| Series EE and I savings bonds | Taxable, usually when the bond matures or you cash it in | You can choose to report interest yearly instead |
| Municipal bonds | Not taxable | Still must be reported on your return |
A municipal bond is a bond issued by a state, the District of Columbia or a U.S. territory. Its interest is reportable but not federally taxable.
Interest on Series EE or I bonds issued after 1989 may also be tax-free if you use the bonds for qualified higher education expenses. You’d claim that exclusion on Form 8815. Municipal bond and qualifying savings bond interest belong to a broader group of income that isn’t taxable.
How to Report Interest Income on Your Return
Once you know which interest is taxable, the next step is reporting all of it, including the tax-exempt kind.
Form 1099-INT
Form 1099-INT is a tax form that a bank or other payer sends to show how much interest it paid you. You should get one if you received $10 or more of interest. You still need to report all your interest even if no form arrives.
Make sure each payer has your correct taxpayer identification number, such as your Social Security number. If it doesn’t, you could face a penalty, and the payer may have to withhold tax from your interest (called backup withholding).
Where Interest Goes on Form 1040
You report interest in two places on Form 1040 or 1040-SR:
- Taxable interest goes on line 2b.
- Tax-exempt interest goes on line 2a.
You’ll also need to file Schedule B if you had over $1,500 of taxable interest or ordinary dividends. The same steps apply on your first tax return.
How Interest Income Can Raise Your Tax Bill
Reported interest adds to your taxable income, so a larger interest balance can mean a larger tax bill. Interest doesn’t get a special lower tax rate.
Net Investment Income Tax
Higher earners may owe an extra 3.8% net investment income tax on interest. It applies to the lesser of your net investment income or the amount your modified adjusted gross income (MAGI) is over a set threshold. MAGI starts with your adjusted gross income (AGI), which is your total income minus certain adjustments.
The threshold depends on your filing status.
| Filing status | MAGI threshold |
|---|---|
| Married filing jointly or qualifying surviving spouse | $250,000 |
| Single or head of household | $200,000 |
| Married filing separately | $125,000 |
Earned Income Tax Credit
Interest can also affect credits. Both taxable and tax-exempt interest count toward the EITC investment income limit, so earning too much interest can make you ineligible.
