Interest Income

Taxable Interest

Interest is money paid in exchange for the use of money. Interest is generally earned through deposit
accounts, investments, and loans to others.

A taxpayer should receive Form 1099-INT from each payor who paid interest of $10 or more. Certain
taxpayers may receive Schedule K-1 if they have reportable interest from partnerships, S corporations,
estates, and trusts.

Taxable interest includes income from various sources such as the following:

● Bank, savings and loan, or credit union accounts

● Certificates of deposit

● U.S. Treasury bills, notes, and bonds (exempt from all state and local income taxes)

● Loans made to others

● Gifts more than $10 for opening financial accounts ($20 if the account is more than $5,000)

● Interest received on tax refunds

● U.S. Savings Bond interest

1. Series H and HH – Report semi-annual interest payments in the year received.

2. Series I, E, and EE – Interest is credited at maturity. Taxpayers who use the cash method of
accounting may elect to defer reporting interest until maturity; those using the accrual
method must report the interest on U.S. savings bonds each year as it accrues. Interest may
be tax-free if used for qualified education expenses.

TIP: Interest from Series I or EE bonds may be tax-free if used to pay for qualified education expenses
the same year. This exclusion is known as the Education Savings Bond Program and is not available

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when married filing separately. A taxpayer uses Form 8815 to figure the exclusion and attaches the form
to Form 1040.

Nominees

A taxpayer may receive a Form 1099-INT that includes interest received as a nominee, that is, in the
taxpayer's name, but the interest actually belongs to someone else. A taxpayer that received interest as a
nominee, must give the actual owner a Form 1099-INT (unless the owner is the taxpayer's spouse) and
file Form 1099-INT with the IRS.

A taxpayer who receives interest as a nominee on 20X1 Form 1099-INT must report that interest to the
actual owner by filing 20X1 Form 1099-INT for the nominee interest along with Form 1096, Annual
Summary and Transmittal of U.S. Information Returns, with the IRS by February 28, 20X2 (March 31,
20X2, if filing electronically). In addition, the taxpayer must furnish the actual owner of the interest with
copy B of the 20X1 Form 1099-INT by January 31, 20X2.

In certain circumstances, a shareholder may receive dividends as a nominee on Form 1099-DIV. When
this occurs, the same rules apply except the taxpayer must submit Form 1099-DIV.

Generally, if someone receives interest as a nominee for you, that person will give you a Form 1099-INT
showing the interest received on your behalf. If you receive a Form 1099-INT that includes amounts
belonging to another person, report the full amount shown as interest on Schedule B. Then, on Schedule
B, below a subtotal of all interest income listed, enter “Nominee Distribution” and the amount of interest
income that actually belongs to someone else. Subtract that nominee amount from the interest income
subtotal. An example of when this occurs is a joint account with one owner indicated as the tax-reporting
holder and the other owner(s) is other than a spouse.

EXAMPLE: You and your sister have a joint savings account that paid $1,500 interest for 20X1. 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 each of you has invested. Because your SSN was given to the
bank, you received a 20X1 Form 1099-INT for the total interest income earned for 20X1, which includes
the interest income belonging to your sister. The interest income belonging to your sister is $450, or 30%
of the total interest of $1,500.

You must give your sister a nominee 20X1 Form 1099-INT by January 31, 20X2, showing $450 of interest
income she earned for 20X1. You also must send a 20X1 Form 1099-INT, along with Form 1096, to the
Internal Revenue Service Center by February 28, 20X2 (March 31, 20X2, if you file Form 1099-INT

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electronically). Show your own name, address, and SSN as that of the "Payer" on Form 1099-INT. Show
your sister's name, address, and SSN in the blocks provided for identification of the "Recipient."

When you prepare your tax return, report the total amount of interest income, $1,500, on Schedule B, Part
I, 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 B and identify this subtraction as a
"Nominee Distribution." (If your sister has to file a tax return, she will report the $450 of interest income on
her tax return (Schedule B, Part I) and will identify you as the payer of that amount.)

SELLER-FINANCED MORTGAGE

A taxpayer who sold their home or other property and receives interest from a seller-financed mortgage
and the buyer used the property as a personal residence, reports the amount of interest income on
Schedule B, Part I. On Schedule B, report the interest received from the buyer on a mortgage or other
form of seller financing and identify the buyer’s name, address, and SSN. (Note: List this interest first on
Schedule B, Part I.)

Original Issue Discount (OID)

Original issue discount (OID) is a form of interest. Taxpayers include a portion of the discount as income
as it accrues over the term of the debt instrument, even if they do not receive any payments from the
issuer. A debt instrument generally has OID when the debtor issues the instrument for a price that is less
than its stated redemption price at maturity. OID is the difference between the stated redemption price at
maturity and the issue price. The IRS presumes that all debt instruments that do not pay interest before
maturity are issued at a discount. Zero-coupon bonds are one example of these instruments.

The OID accrual rules generally do not apply to short-term obligations (those with a fixed maturity date of
one year or less from date of issue). The taxpayer may treat the discount as zero if it is less than
one-fourth of 1% (.0025) of the stated redemption price at maturity multiplied by the number of full years
from the date of original issue to maturity. This small discount is known as “de minimis” OID.

EXAMPLE: You bought a 10-year bond with a stated redemption price at maturity of $1,000, issued at
$980 with OID of $20. One-fourth of 1% of $1,000 (stated redemption price) times 10 (the number of full
years from the date of original issue to maturity) equals $25. Because the $20 discount is less than $25,
the OID is treated as zero. (If you hold the bond at maturity, you will recognize $20 ($1,000 − $980) of
capital gain.)

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Assume the facts are the same, except that the bond was issued at $950. The OID is $50. Because the
$50 discount is more than the $25 (one-fourth of 1%), you must include the OID in income as it accrues
over the term of the bond.

EXCEPTIONS TO REPORTING OID

The OID rules do not apply to the following debt instruments:

● Tax-exempt obligations

● U.S. savings bonds

● Short-term debt instruments (with a fixed maturity date one year or less from the date of issue)

● Obligations issued by an individual before March 2, 1984

● Loans between individuals, if all the following are true:

1. The lender is not in the business of lending money

2. All outstanding loans between the same individuals total $10,000 or less

3. Avoiding any federal tax is not one of the principal purposes of the loan