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Interest Income

In general, any interest you receive through an account credit or other means is taxable income.

Taxable Interest Income

  • Federal Bonds
  • Industrial development bonds.
  • Corporate bonds.
  • Premium received for opening a savings account (e.e. prizes and awards) are included at FMV.
  • Part of the proceeds from an installment sale is taxable as interest.
  • Interest paid by federal or state government for late payment of tax refund is taxable.
  • For certain taxpayers and certain bonds, amortization of a bond premium is offset(reduction) to the interest received and a reduction to the bond’s basis, and amortization of a bond discount is an addition to the interest received and an addition to the bond’s basis.

Tax Exempt Interest Income

Tax Exempt Interest Income is reportable but not taxable.

  • State and Local Government Bonds/Obligations

    Interest on state and local bonds/obligations is tax/exempt. Mutual fund dividends for funds invested in tax-free bonds are also tax exempt.

  • Bonds of U.S. Possession

    Interest on the obligation of a possession of the United States is tax exempt.

  • Series EE (U.S. Savings Bonds)

    • Interest on Series EE Savings Bonds is tax exempt when:
      • It is used to pay for higher education, reduced by tax-free scholarships, of the taxpayer, spouse, or dependents;
      • There is taxpayer or joint ownership (spouse);
      • Taxpayer is over age 24 when issued; and
      • The bonds are acquired after 1989.
    • Phase-out starts when modified AGI exceeds an indexed amount. (For 2012, phase out begins at $72,850 for single and head of household and $109,250 for married filing joint. There is no exclusion for those using the married filing separately status.
  • Veterans Administration Insurance

    Interest on Veterans Administration Insurance is tax exempt.


Form 1099 INT
Schedule B – Interest & Dividends
Publication 550

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