Informed Investor: All interest income must be reported on a tax return

All interest income received during 2013 must be reported on an individual’s 2013 federal income tax return. For those who file Form 1040, taxable interest income is reported on line 8b. Tax-exempt interest income is reported on line 8a of Form 1040.

A 1099-INT must be issued to any individual who: (1) was paid during 2013 at least $10 of interest, including interest paid by banks and credit unions, brokerages, the U.S. Treasury, and municipalities; (2) was paid at least $600 of interest in the ordinary course of business such as interest on a delayed death benefit from a life insurance company; or (3) had federal income taxes withheld under the IRS backup withholding rules. Note that if the individual received less than $10 in interest income from a particular interest-bearing account during the year, the individual will most likely not receive a 1099-INT for that account. The individual is nevertheless required to report any amount of interest received during the year.

Other interest income that must be reported on one’s tax return include: (1) interest on insurance dividends left on deposit with an insurance company that can be withdrawn annually, taxable in the year it is credited to the account; (2) interest paid on federal and state income tax refunds; (3) interest paid by a condemning authority to compensate for a delay in payment of an award; and (4) accumulated interest in an annuity contract sold before its maturity date.

Interest earned on certificates of deposit (CD) and similar investments is taxable each year it is earned, even though the interest earned may not be withdrawn until a subsequent calendar year. The only exception is interest income from CDs maturing in one year or less in which the income is recognized in the year the CD matures, as the following example illustrates:

Jill opened a six-month CD at her credit union on Oct. 15, 2013. The CD matures April 15, 2014. Jill will include the six months of interest income on her 2014 income taxes, even though 2.5 months of interest income was earned during 2013.

Many credit unions pay dividends on checking and savings accounts. These dividends are considered interest payments and should be reported as interest income. But any dividends paid on money market accounts should be reported as dividend income, not interest income.

U.S. Savings Bonds

Paper Series EE U.S. Savings Bonds—purchased at a 50 percent discount—are no longer sold at financial institutions. Only electronic EE bonds are sold online and at face value. Interest paid on EE Savings Bonds is subject to federal income tax but not to state and local income taxes. For most savings bonds owners, interest income is not taxed until the year the bonds are cashed (bond owners will receive a Form 1099-INT). Bond owners may elect to report interest annually and pay tax each year. When qualifying EE Savings Bonds are cashed to pay a dependent’s college tuition and fees, the interest income may be excluded from income if adjusted gross income (AGI) limitations are met.

 Paper Series I U.S. Savings Bonds may be purchased at financial institutions and issued at face value. Electronic bonds are bought online through TreasuryDirect, also at face value. When a Series I bond is redeemed or matures, all interest paid is subject to federal but not to state or local income taxes. Like Series EE Savings Bonds, a bond owner may elect to pay tax each year on the annual interest paid. Also like Series EE Savings Bonds, when qualifying Series I Savings Bonds are cashed to pay a dependent’s college tuition and fees, interest income may be excluded from income if AGI limitations are met.

The following table summarizes who reports taxable interest on EE and I U.S. Savings Bonds:

In the event a Series EE U.S. Savings bond owner died during 2013, there are two options for reporting the deferred interest on their bonds: (1) include the deceased individual’s share of interest on the decedent’s final income tax return. The bond’s beneficiary will pay tax only on the amount of interest that accrues after death; or (2) all interest is taxed to the beneficiary either when the bonds are cashed or annually if the beneficiary elects to pay the tax annually on the bonds’ annual interest.