Reporting Interest Income and Related Expenses
Taxable and tax-exempt interest income is reported on the tax return. Interest is subject to the federal income tax and the net investment income tax.
Source documents needed: Form 1099-INT, Form 1099-OID and bank statements.
Note: financial institutions issue 1099-INT forms if at least $10 of interest was paid out. If you earned less than $10 of interest, you may need to reference your bank statements to determine how much interest income to report on your tax return.
Similarly, you will need to reference bank or brokerage statements to determine the amount of interest earned in foreign bank accounts or on bonds held in a foreign brokerage accounts. For foreign interest, you’ll tally up the amount of interest you actually received during the year and convert those amounts to US dollars. If you have foreign accounts, you might also need to file the foreign bank account report (Form 114) with the Treasury Department and disclose your foreign financial assets on Form 8938 with your tax return.
Where interest goes on the tax return:
- Taxable interest is reported on Line 8a of Form 1040 or 1040A, Line 2 of Form 1040EZ.
- Tax-exempt interest is reported on Line 8b of Form 1040 or 1040A.
Use Schedule B to tally up interest if your interest income or dividend income exceeds $1,500.
Expenses Related to Interest Income
If you liquidated a certificate of deposit priority to maturity, you may have forfeited
some of your interest. This early withdrawal penalty is deducted as an adjustment to income. The amount of the penalty is reported on Form 1099-INT box 2.
If you borrowed money to fund your investment, the interest paid can be deducted as part of the investment interest deduction.
Expenses related to producing interest income can be deducted as a miscellaneous itemized deduction. This would include expenses for financial planning and investment management and safe deposit box fees.
Tax Planning Opportunity with Savings Bonds
Taxes on interest income earned by US savings bonds can be deferred until the savings bond is matures or is redeemed. However, individuals have the option of paying tax on the interest each year. Eva Rosenberg recently explained how paying the tax now can be beneficial in her article, “When Do I Pay Taxes on the Interest Earned from Savings Bonds?” at the Equifax Blog.