An individual can earn interest income from different sources. Banks generally provide interest on money held in savings account. An individual may also open a fixed deposit (long term deposit) in order to earn a higher rate interest.

Interest is normally credited to an individual’s account on a periodical basis (in case of savings account) or on the maturity of fixed deposit. Further an individual may earn interest income from investments made in corporate bonds or debentures. An individual has to report interest income to IRS. Almost every kind of interest income is subject to income tax.

Let us discuss some of the Important Provisions related to reporting of Interest Income in Tax Return.

a) Dividends Received to be treated as Interest:

An individual may receive dividends on any deposits held with credit unions, cooperative banks, mutual savings banks and so on. These dividends are required to be treated as interest in the income tax return.

b) Copy B of Form 1099 – INT:

Interest income form 1099 – INT (Copy B) should be provided by the payer of dividend/interest to the payee. Generally, such a form will be received from a particular bank or financial institution in cases where the amount of interest paid during the year exceeds $ 10.

Form 1099 – INT will be provided by the bank or financial institution irrespective of the fact that the interest income of an individual is subject to tax or not.

However, an individual will be required to report all of his/her interest income in the tax return even if such form has not been received. Interest income received from a particular source should match with the amount of interest mentioned in Form 1099 – INT.

c) Exempted Interest Income:

Any kind of interest income from treasury bills, notes or bonds received by an individual will not be subject to state or local income tax. Such income will be subject to tax at the federal level only.

Even when the interest income is exempt from tax, individual should report the total amount of interest received by him/her during the year. Any such reporting of total interest (taxable + exempt) will not result in a tax liability on the exempted amount of interest income.

d) Interest Income Reporting:

In case interest income is received from different sources, multiple forms from different banks/institutions will be received by the individual. It is the responsibility of the tax payer to ensure that correct interest income is reported in the tax return filed by him/her on the basis of all 1099 – INT forms received by him/her.

For Instance, an individual has savings account with two different banks. He earned an interest income of $ 50 on the balance in one saving account and $ 9 on the balance in other saving account. Further he received interest of $ 50 from his investment in treasury bills.

This individual will receive Form 1099 – INT from only two sources as the amount of interest received from one bank was less than $ 10. However, he will have to report an amount equivalent to $ 109 as his total interest income for the year in which such income was credited to his account.

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