How To Report Interest Income

Words you may need to know (see Glossary):

• Nominee
• Original issue discount (OID)

Generally, you report all of your taxable interest income on line 8a, Form 1040; line 8a, Form 1040A; or line 2, Form 1040EZ.

You cannot use Form 1040EZ if your interest income is more than $400. Instead, you must use Form 1040A or Form 1040.

In addition, you cannot use Form 1040EZ if you must use Form 1040, as described later, or if any of the statements listed under Schedule B, later, are true.

Form 1040A. You must complete Part I of Schedule 1 (Form 1040A) if you file Form 1040A and any of the following are true.

1. Your taxable interest income is more than $400.
2. You are claiming the interest exclusion under the Education Savings Bond Program (discussed earlier).
3. You received interest from a seller-financed mortgage, and the buyer used the property as a home.
4. You received a Form 1099-INT for tax-exempt interest.
5. You received a Form 1099-INT for U.S. savings bond interest that includes amounts you reported before 2001.
6. You received, as a nominee, interest that actually belongs to someone else.
7. You received a Form 1099-INT for interest on frozen deposits.

List each payer's name and the amount of interest income received from each payer on line 1. If you received a Form 1099-INT or Form 1099-OID from a brokerage firm, list the brokerage firm as the payer.

You cannot use Form 1040A if you must use Form 1040, as described next.

Form 1040. You must use Form 1040 instead of Form 1040A or Form 1040EZ if:

1. You forfeited interest income because of the early withdrawal of a time deposit,
2. You received or paid accrued interest on securities transferred between interest payment dates,
3. You had a financial account in a foreign country, unless the combined value of all foreign accounts was $10,000 or less during all of 2001 or the accounts were with certain U.S. military banking facilities,
4. You acquired taxable bonds after 1987 and choose to reduce interest income from the bonds by any amortizable bond premium (discussed in chapter 3 under Bond Premium Amortization), or
5. You are reporting OID in an amount more or less than the amount shown on Form 1099-OID.

Schedule B. You must complete Part I of Schedule B (Form 1040) if you file Form 1040 and any of the following apply.

1. Your taxable interest income is more than $400.
2. You are claiming the interest exclusion under the Education Savings Bond Program (discussed earlier).
3. You had a foreign account.
4. You received interest from a seller-financed mortgage, and the buyer used the property as a home.
5. You received a Form 1099-INT for tax-exempt interest.
6. You received a Form 1099-INT for U.S. savings bond interest that includes amounts you reported before 2001.
7. You received, as a nominee, interest that actually belongs to someone else.
8. You received a Form 1099-INT for interest on frozen deposits.
9. You received a Form 1099-INT for interest on a bond that you bought between interest payment dates.
10. Statement (4) or (5) in the preceding list is true.

On line 1, Part I, list each payer's name and the amount received from each. If you received a Form 1099-INT or Form 1099-OID from a brokerage firm, list the brokerage firm as the payer.

Reporting tax-exempt interest. Report the total of your tax-exempt interest (such as interest or accrued OID on certain state and municipal bonds) and exempt-interest dividends from a mutual fund on line 8b of Form 1040A or Form 1040. If you file Form 1040EZ, print "TEI" in the space to the right of the words "Form 1040EZ" on line 2. After "TEI," show the amount of your tax-exempt interest, but do not add tax-exempt interest in the total on Form 1040EZ, line 2.

You should not have received a Form 1099-INT for tax-exempt interest. But if you did, you must fill in Schedule 1 (Form 1040A) or Schedule B (Form 1040). See the Schedule 1 or Schedule B instructions for how to report this. Be sure to also show this tax-exempt interest on line 8b.

Do not report interest from an individual retirement arrangement (IRA) as tax-exempt interest.

Form 1099-INT. Your taxable interest income, except for interest from U.S. savings bonds and Treasury obligations, is shown in box 1 of Form 1099-INT. Add this amount to any other taxable interest income you received. You must report all of your taxable interest income even if you do not receive a Form 1099-INT.

1099 INT

If you forfeited interest income because of the early withdrawal of a time deposit, the deductible amount will be shown on Form 1099-INT, in box 2. See Penalty on early withdrawal of savings, later.

Box 3 of Form 1099-INT shows the amount of interest income you received from U.S. savings bonds, Treasury bills, Treasury notes, and Treasury bonds. Add the amount shown in box 3 to any other taxable interest income you received, unless part of the amount in box 3 was previously included in your interest income. If part of the amount shown in box 3 was previously included in your interest income, see U.S. savings bond interest previously reported, later. If you redeemed U.S. savings bonds you bought after 1989 and you paid qualified educational expenses, see Interest excluded under the Education Savings Bond Program, later.

Box 4 (federal income tax withheld) of Form 1099-INT will contain an amount if you were subject to backup withholding. Report the amount from box 4 on Form 1040EZ, line 8, on Form 1040A, line 37, or on Form 1040, line 59.

Box 5 of Form 1099-INT shows investment expenses you may be able to deduct as an itemized deduction. Chapter 3 discusses investment expenses.

You may be able to take a credit for the amount shown in box 6 (foreign tax paid) unless you deduct any amount on Schedule A of Form 1040 as "Other taxes." To take the credit, you may have to file Form 1116, Foreign Tax Credit. For more information, see Publication 514, Foreign Tax Credit for Individuals.

Form 1099-OID. The taxable OID on a discounted obligation for the part of the year you owned it is shown in box 1 of Form 1099-OID. Include this amount in your total taxable interest income. But see Refiguring OID shown on Form 1099-OID under Original Issue Discount (OID), earlier.

You must report all taxable OID even if you do not receive a Form 1099-OID.

Box 2 of Form 1099-OID shows any taxable interest on the obligation other than OID. Add this amount to the OID shown in box 1 and include the result in your total taxable income.

If you forfeited interest or principal on the obligation because of an early withdrawal, the deductible amount will be shown in box 3. See Penalty on early withdrawal of savings, later.

Box 4 of Form 1099-OID will contain an amount if you were subject to backup withholding. Report the amount from box 4 on Form 1040EZ, line 8, on Form 1040A, line 37, or on Form 1040, line 59.

Box 7 of Form 1099-OID shows investment expenses you may be able to deduct as an itemized deduction. Chapter 3 discusses investment expenses.

U.S. savings bond interest previously reported. If you received a Form 1099-INT for U.S. savings bond interest, the form may show interest you do not have to report. See Form 1099-INT for U.S. savings bond interest under U.S. Savings Bonds, earlier.

On line 1, Part I of Schedule B (Form 1040), or on line 1, Part I of Schedule 1 (Form 1040A), report all the interest shown on your Form 1099-INT. Then follow these steps.

1. Several lines above line 2, enter a subtotal of all interest listed on line 1.
2. Below the subtotal print "U.S. Savings Bond Interest Previously Reported" and enter amounts previously reported or interest accrued before you received the bond.
3. Subtract these amounts from the subtotal and enter the result on line 2.

Example 1. Your parents bought U.S. savings bonds for you when you were a child. The bonds were issued in your name, and the interest on the bonds was reported each year as it accrued. (See Choice to report interest each year under U.S. Savings Bonds, earlier.)

In April 2001, you redeemed one of the bonds -- a $1,000 series EE bond. The bond was originally issued in March 1983. When you redeemed the bond, you received $1,600.80 for it.

The Form 1099-INT you received shows interest income of $1,100.80. However, since the interest on your savings bonds was reported yearly, you need only include the $42.80 interest that accrued from January 2001 to April 2001.

You received no other taxable interest for 2001. You file Form 1040A.

On line 1, Part I of Schedule 1 (Form 1040A), enter your interest income as shown on Form 1099-INT -- $1,100.80. (If you had other taxable interest income, you would enter it next and then enter a subtotal, as described earlier, before going to the next step.) Several lines above line 2, print "U.S. Savings Bond Interest Previously Reported" and enter $1,058.00 ($1,100.80 - $42.80). Subtract $1,058.00 from $1,100.80 and enter $42.80 on line 2. Enter $42.80 on line 4 of Schedule 1 and on line 8a of Form 1040A.

Example 2. Your uncle died and left you a $1,000 series EE bond. You redeem the bond when it reaches maturity.

Your uncle paid $500 for the bond, so $500 of the amount you receive upon redemption is interest income. Your uncle's executor included in your uncle's final return $200 of the interest that had accrued at the time of your uncle's death. You have to include only $300 in your income.

The bank where you redeem the bond gives you a Form 1099-INT showing interest income of $500. You also receive a Form 1099-INT showing taxable interest income of $300 from your savings account.

You file Form 1040 and you complete Schedule B. On line 1 of Schedule B, you list the $500 and $300 interest amounts shown on your Forms 1099. Several lines above line 2, you put a subtotal of $800. Below this subtotal, print "U.S. Savings Bond Interest Previously Reported" and enter the $200 interest included in your uncle's final return. Subtract the $200 from the subtotal and write $600 on line 2. You then complete the rest of the form.

Worksheet for savings bonds distributed from a retirement or profit-sharing plan. If you cashed a savings bond acquired in a taxable distribution from a retirement or profit-sharing plan (as discussed under U.S. Savings Bonds, earlier), your interest income does not include the interest accrued before the distribution and taxed as a distribution from the plan.

Use the worksheet below to figure the amount you subtract from the interest shown on Form 1099-INT.

Your employer should tell you the value of each bond on the date it was distributed.

Example. You received a distribution of series EE U.S. savings bonds in January 2000 from your company's profit-sharing plan.

In April 2001, you redeemed a $100 series EE bond that was part of the distribution you received in 2000. You received $93.04 for the bond the company bought in May 1990. The value of the bond at the time of distribution in 2000 was $87.68. (This is the amount you included on your 2000 return.) The bank gave you a Form 1099-INT that shows $43.04 interest (the total interest from the date the bond was purchased to the date of redemption). Since a part of the interest was included in your income in 2000, you need to include in your 2001 income only the interest that accrued after the bond was distributed to you.

On line 1 of Schedule B (Form 1040), include all the interest shown on your Form 1099-INT as well as any other taxable interest income you received. Several lines above line 2, put a subtotal of all interest listed on line 1. Below this subtotal print "U.S. Savings Bond Interest Previously Reported" and enter the amount figured on the worksheet below.

Subtract $37.68 from the subtotal and enter the result on line 2 of Schedule B. You then complete the rest of the form.

Interest excluded under the Education Savings Bond Program. Use Form 8815, to figure your interest exclusion when you redeem qualified savings bonds and pay qualified higher educational expenses during the same year.

For more information on the exclusion and qualified higher educational expenses, see the earlier discussion under Education Savings Bond Program.

You must show your total interest from qualified savings bonds that you cashed during 2001 on line 6 of Form 8815 and on line 1 of either Schedule 1 (Form 1040A) or Schedule B (Form 1040). After completing Form 8815, enter the result from line 14 (Form 8815) on line 3 of Schedule 1 (Form 1040A) or line 3 of Schedule B (Form 1040).

Interest on seller-financed mortgage. If an individual buys his or her home from you in a sale that you finance, you must report the buyer's name, address, and social security number on line 1 of Schedule 1 (Form 1040A) or line 1 of Schedule B (Form 1040). If you do not, you may have to pay a $50 penalty. The buyer may have to pay a $50 penalty if he or she does not give you this information.

You must also give your name, address, and social security number (or employer identification number) to the buyer. If you do not, you may have to pay a $50 penalty.

Frozen deposits. Even if you receive a Form 1099-INT for interest on deposits that you could not withdraw at the end of 2001, you must exclude these amounts from your gross income. (See Interest income on frozen deposits under Interest Income, earlier.) Do not include this income on line 8a of Form 1040A or Form 1040. In Part I of Schedule 1 (Form 1040A) or Part I of Schedule B (Form 1040), include the full amount of interest shown on your Form 1099-INT on line 1. Several lines above line 2, put a subtotal of all interest income. Below this subtotal, write "Frozen Deposits" and show the amount of interest that you are excluding. Subtract this amount from the subtotal and write the result on line 2.

Accrued interest on bonds. If you received a Form 1099-INT that reflects accrued interest paid on a bond you bought between interest payment dates, include the full amount shown as interest on the Form 1099-INT on line 1, Part I of Schedule B (Form 1040). Then, below a subtotal of all interest income listed, print "Accrued Interest" and the amount of accrued interest that you paid to the seller. That amount is taxable to the seller, not you. Subtract that amount from the interest income subtotal. Enter the result on line 2 and also on Form 1040, line 8a.

For more information, see Bonds Sold Between Interest Dates, earlier.

Nominee distributions. If you received a Form 1099-INT that includes an amount you received as a nominee for the real owner, report the full amount shown as interest on the Form 1099-INT on line 1, Part I of Schedule 1 (Form 1040A) or Schedule B (Form 1040). Then, below a subtotal of all interest income listed, write "Nominee Distribution" and the amount that actually belongs to someone else. Subtract that amount from the interest income subtotal. Enter the result on line 2 and also on line 8a of Form 1040A or 1040.

File Form 1099-INT with the IRS. If you received interest as a nominee in 2001, you must file a Form 1099-INT for that interest with the IRS. Send Copy A of Form 1099-INT with a Form 1096, Annual Summary and Transmittal of U.S. Information Returns, to your Internal Revenue Service Center by February 28, 2002 (April 1, 2002 if you file Form 1099-INT electronically). Give the actual owner of the interest Copy B of the Form 1099-INT by January 31, 2002. On Form 1099-INT, you should be listed as the "Payer." Prepare one Form 1099-INT for each other owner and show that person as the "Recipient." However, you do not have to file Form 1099-INT to show payments for your spouse. For more information about the reporting requirements and the penalties for failure to file (or furnish) certain information returns, see the General Instructions for Forms 1099, 1098, 5498, and W2-G.

Similar rules apply to OID reported to you as a nominee on Form 1099-OID. You must file a Form 1099-OID with Form 1096 to show the proper distributions of the OID.

Example. You and your sister have a joint savings account that paid $1,500 interest for 2001. Your sister deposited 30% of the funds in this account, and you and she have agreed to share the yearly interest income in proportion to the amount that each of you has invested. Because your social security number was given to the bank, you received a Form 1099-INT for 2001 that includes the interest income belonging to your sister. This amount is $450, or 30% of the total interest of $1,500.

You must give your sister a Form 1099-INT by January 31, 2002, showing $450 of interest income that she earned for 2001. You must also send a copy of the nominee Form 1099-INT, along with Form 1096, to the Internal Revenue Service Center by February 28, 2002 (April1, 2002, if you file form 1099-INT electronically). Show your own name, address, and social security number as that of the "Payer" on the Form 1099-INT. Show your sister's name, address, and social security number in the blocks provided for identification of the "Recipient."

When you prepare your own federal income tax return, report the total amount of interest income, $1,500, on line 1, Part I of Schedule 1 (Form 1040A) or line 1, Part I of Schedule B (Form 1040), and identify the name of the bank that paid this interest. Show the amount belonging to your sister, $450, as a subtraction from a subtotal of all interest on Schedule 1 (or Schedule B) and identify this subtraction as a "Nominee Distribution." (Your sister will report the $450 of interest income on her own tax return, if she has to file a return, and identify you as the payer of that amount.)

Original issue discount (OID) adjustment. If you are reporting OID in an amount greater or less than the amount shown on Form 1099-OID or other written statement (such as for a REMIC regular interest), include the full amount of OID shown on your Form 1099-OID or other statement on line 1, Part I of Schedule B (Form 1040). If the OID to be reported is less than the amount shown on Form 1099-OID, show the OID you do not have to report below a subtotal of the interest and OID listed. Identify the amount as "OID Adjustment" and subtract it from the subtotal. If the OID to be reported is greater than the amount shown on Form 1099-OID, show the additional OID below the subtotal. Identify the amount as "OID Adjustment" and add it to the subtotal.

Penalty on early withdrawal of savings. If you withdraw funds from a time-savings or other deferred interest account before maturity, you may be charged a penalty. The Form 1099-INT or similar statement given to you by the financial institution will show the total amount of interest in box 1 and will show the penalty separately in box 2. You must include in income all the interest shown in box 1. You can deduct the penalty on line 30, Form 1040. Deduct the entire penalty even if it is more than your interest income.

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