Interest paid to you on CD's, money market accounts, certain bonds and other financial instruments is taxable, and it must be reported to the IRS.
• Briefly describes interest income
• Explains how you should report different types of interest
• Links to further information on taxable investment income
If you want to avoid costly mistakes, while at the same time taking advantage of all credits and deductions, you'll want to do your taxes with TurboTax this year.
TurboTax helps you work quickly and easily, and it double-checks your return to help you get the largest possible refund. You can even file your state taxes and get your state refund (which may be substantial) much faster than if you mail a paper return.
By definition, interest is the capital you gain for loaning money to a bank, a company, or the government.
If you accumulate more than ten dollars in interest during the tax year, you will receive a Form 1099-INT from each institution paying you interest.
If you receive less than ten dollars they are not required to send you this form, but you are still required to pay taxes on it. To determine the exact amount, you will need to add up the interest reported on all your monthly statements.
Most interest is taxable, but there are sources of tax-exempt interest.
Interest earned from state and local government issued municipal bonds and tax-exempt interest from mutual funds are both non-taxable.
You still need to report this income, just don't report it with your taxable interest. There is a separate line on your tax return where you should report this type of interest.
If you have interest totaling less than $1,500 you can enter the amount directly onto your return, without filling out additional forms.
Generally, you report all of your taxable interest income on line 8a, Form 1040; line 8a, Form 1040A; or line 2, Form 1040EZ.
Or you can e-file.
You cannot use Form 1040EZ if your interest income is more than $1,500. Instead, you must use Form 1040A or Form 1040.
Also, if your interest income includes income from a seller-financed mortgage or foreign investments or if you have a 1099-INT reporting tax-exempt interest, you are required to complete Schedule B, if you file a 1040, or Schedule 1, if you file a 1040a.
NOTE: these are only some of the criteria that are used to determine where you report interest income, and which forms you are allowed to file. For a more detailed look, see reporting interest income. If you choose to work on your tax return online, the filing system will ask you simple questions, and on the basis of your answers it will fill out all the appropriate forms, which you will never have to deal with.
The beauty of using an online tax-filing program lies in their simplicity. You answer a few plain-English questions, fill in the numbers where required, and all the calculations, filing, and error checking is done for you, automatically.
You can e-file online with TurboTax where you'll have the option of having a tax professional assist you with your return. It's free to work on your return - you pay nothing until you file.
You can get more information about reporting interest income, directly from the IRS, in the form of Publication 550 which also deals with another favorite subject, capital gains tax laws.
If you file a paper tax return, you will need to attach Schedule A with your 1040, or Schedule 1 with your 1040a. (If you do your taxes online, all of this will be taken care of for you automatically.)