Taxable and Tax Exempt Interest Income


Most interest you receive that’s available for a withdrawal is taxable income. This can include interest on:

  • Bank accounts
  • Money market accounts
  • Deposited insurance dividends

If you receive taxable interest on a regular basis, you might have to pay estimated tax. However, interest on insurance dividends you leave on deposit with the Department of Veterans Affairs isn’t taxable.

You usually don’t have to report interest on Series EE and Series I U.S. Savings Bonds until the earliest of these dates:

  • You redeem the bonds.
  • You dispose of the bonds.
  • The bonds mature.

If you expect to be in a higher tax bracket when you redeem the bonds, it might benefit you to report the interest annually. You can exclude interest from bonds issued after 1989 from income if you:

  • Pay qualified higher educational expenses during the year
  • Meet other requirements

Certain distributions commonly known as dividends are actually interest. They include dividends on deposits or share accounts in:

  • Cooperative banks
  • Credit unions
  • Domestic savings and loan associations
  • Federal savings and loan associations
  • Mutual savings banks

You might need to include part of the original issue discount in your income each year as interest. Do this if you have one of these issued at a discount:

  • Bond
  • Note
  • Other debt instrument

You’ll need to show the amount of any tax-exempt interest you received during the tax year. This doesn’t convert tax-exempt interest to taxable interest. It’s an information-reporting requirement only.

From each payer of interest of $10 or more, you should receive one of these:

  • Form 1099-INT
  • Form 1099-OID
  • Statement similar to a 1099-INT or 1099-OID

The form or statement will show the interest you must report.

Form 1099-INT also will also show any tax-exempt interest that’s taxable for the Alternative Minimum Tax (AMT). Enter this interest only on Form 6251.

To learn more, see these tax tips:

  • Dividends
  • Form 1099
  • Rental Income

Related Topics

Related Resources

Reporting Short Sale On Taxes

Learn more about reporting a short sale on your taxes with advice from the tax experts at H&R Block.

Tax Questions, Answered: The Tax Implications Of Selling Your Home

If you make a profit on the sale of your home, the gain may not be taxable. Learn more about the tax implications of selling a house with the experts at H&R Block.

Filing a Dependent’s Tax Return

Do you have a dependent child who’s wondering how to file a dependent tax return? Learn more about dependent tax filing with the experts at H&R Block.

Holiday Bonus Taxes

Learn more about taxes on bonuses that you may receive at your job, including holiday bonuses, signing bonuses and cash bonuses, with the help of H&R Block.