Do I Have to Report Interest Income?

Interest income is money earned from allowing another entity to use your funds. It can arise from various sources, including bank accounts, investments, or loans you make to others. The Internal Revenue Service (IRS) requires taxpayers to report all income, and interest income is no exception. Understanding these reporting obligations is key to tax compliance.

Understanding Interest Income

Interest income is compensation received for lending money or holding funds in interest-bearing accounts. Common sources for individuals include traditional savings accounts, interest-earning checking accounts, and certificates of deposit (CDs). Money market accounts and certain types of bonds, such as corporate and U.S. Treasury bonds, also generate interest income.

Interest can also be earned from less conventional sources like peer-to-peer lending or interest paid on income tax refunds. Original Issue Discount (OID) on debt instruments, which is essentially interest, is another form of taxable income. While most interest is taxable, some exceptions exist, such as interest from certain municipal bonds, which may be exempt from federal and sometimes state income tax.

Reporting Thresholds and Requirements

All interest income is taxable unless specifically excluded by law. Every dollar of interest earned, regardless of the amount, must be reported on a federal income tax return. Financial institutions typically issue Form 1099-INT, “Interest Income,” to taxpayers by January 31st if the total interest paid during the year is $10 or more. This form summarizes the interest earned and reported to the IRS.

Even if the interest earned is less than $10 and no Form 1099-INT is issued, the income remains legally reportable. Taxpayers must proactively determine and report these smaller amounts. Similarly, if interest is received from private loans or other sources that do not issue a Form 1099-INT, it is still the taxpayer’s responsibility to report this income. This comprehensive reporting ensures compliance with tax obligations.

Steps for Reporting Interest Income

Taxpayers typically receive informational forms like Form 1099-INT and Form 1099-OID from financial institutions and other payers. Form 1099-INT details various types of interest income, including taxable interest, early withdrawal penalties, and interest from U.S. savings bonds or Treasury obligations. Form 1099-OID reports original issue discount (OID) on debt instruments.

Interest income is generally reported directly on Form 1040, the main individual income tax return. If total taxable interest from all sources exceeds $1,500, or if other conditions apply (such as accrued interest from a bond or interest from a foreign account), taxpayers must also file Schedule B, “Interest and Ordinary Dividends,” with their Form 1040. Schedule B requires listing each payer and the amount of interest received. If a Form 1099-INT or 1099-OID is not received for earned interest income, the taxpayer still reports this income, often by entering the payer’s name and amount directly into tax software or on the appropriate line of the tax form.

Implications of Non-Compliance

Failing to report taxable interest income can lead to various consequences from the IRS. Taxpayers may face penalties for underpayment of tax if their total tax liability is not met due to unreported income. The IRS also charges interest on any unpaid taxes, which compounds daily, increasing the amount owed until paid in full.

In cases where significant income is intentionally omitted, more severe actions could be taken, including accuracy-related penalties, which can be 20% of the underpaid tax. The IRS employs a matching program that compares income reported by financial institutions with what taxpayers report, making unreported income identifiable. Receiving a notice from the IRS about unreported income typically results in a bill for the additional tax due, plus penalties and interest.