To report interest income, add up every dollar of interest you earned during the year and enter the total on your Form 1040: taxable interest goes on Line 2b, tax-exempt interest on Line 2a. If your taxable interest was more than $1,500, you also fill out Schedule B and list each payer by name. That’s the core of it. The details below cover the situations that change what you write on those lines: interest without a 1099, bonds and CDs, loans to family, foreign accounts, and a child’s interest you might roll into your own return.
You Report Every Dollar, 1099 or Not
Banks and brokerages only have to send Form 1099-INT when they pay you $10 or more in interest during the year.1Internal Revenue Service. About Form 1099-INT, Interest Income The reporting rule for you is different: the IRS requires you to report all taxable and tax-exempt interest on your federal return regardless of whether you receive a 1099-INT.2Internal Revenue Service. Topic No. 403, Interest Received Eight dollars from one savings account and six from another is still $14 of taxable interest.
This is the mistake that catches people with small balances at multiple banks, interest on a security deposit refund, or a few dollars from a money market account. The IRS receives copies of every 1099-INT and matches them against your return, and it has other ways to identify unreported interest as well. If you know you earned any interest, report it.
What Form 1099-INT Tells You
When your interest earnings meet the $10 threshold, the paying institution sends Form 1099-INT by the end of January. A few boxes drive what you do at filing time.3Internal Revenue Service. Instructions for Forms 1099-INT and 1099-OID
- Box 1 is your ordinary taxable interest from bank accounts, CDs, and similar deposits. This is the number most people need.
- Box 3 shows interest from Treasury bills, notes, bonds, and U.S. savings bonds. It’s reported separately because it’s exempt from state and local tax in most states.
- Box 4 shows any federal income tax withheld under backup withholding.
- Box 8 shows tax-exempt interest, generally from municipal bonds. It isn’t taxed federally but still gets reported.
- Box 9 shows private activity bond interest, a subset of tax-exempt interest that can trigger the alternative minimum tax.
- Boxes 15 through 17 carry state information, including any state income tax withheld.
Cross-reference the 1099-INT figures against your monthly statements before you file. Institutions occasionally make errors, and discrepancies are easier to resolve in February than during an audit two years later. If you find a mismatch, ask the payer for a corrected form.
Where the Numbers Go on Your Return
Your total taxable interest goes on Line 2b of Form 1040. Tax-exempt interest, from Box 8 of your 1099-INT, goes on Line 2a.4Internal Revenue Service. Instructions for Form 1040 Line 2a doesn’t add to your tax bill, but the IRS uses it in other calculations, including how much of your Social Security benefits become taxable.
If your taxable interest exceeds $1,500, attach Schedule B and list each payer with the amount received.5Internal Revenue Service. About Schedule B (Form 1040), Interest and Ordinary Dividends Even under $1,500, you still need Schedule B if you had a financial interest in a foreign account or received interest as a nominee for someone else. The mechanics are simple: gather every 1099-INT, list each institution and the Box 1 amount on Part I, add them, and carry the total to Line 2b. Add any interest that didn’t come with a 1099 to the list with the payer’s name. Filing software populates Schedule B once you enter your 1099-INT data, but check that every source made it onto the form.
After e-filing, the IRS typically sends an electronic acknowledgment of acceptance within 48 hours.6Internal Revenue Service. Topic No. 301, When, How and Where to File Paper filers attach Schedule B directly behind Form 1040.
When to Recognize Interest
The year interest counts as income depends on your accounting method. Most individuals use the cash method: report interest in the year it’s credited to your account or otherwise made available to you, even if you don’t withdraw it.7Internal Revenue Service. Publication 538, Accounting Periods and Methods If your bank posts $200 in interest in December, that’s this year’s income even if you don’t touch the money until March.
Under the accrual method, which larger businesses typically use, you recognize interest when you’ve earned the right to receive it and can determine the amount with reasonable accuracy. Pick the wrong year and you either pay tax early or risk an underreporting penalty.
Special Situations That Change What You Report
Accrued Interest on Bonds You Bought Mid-Period
If you buy a bond between interest payment dates, you pay the seller for interest that has accrued since the last payment. When the bond makes its next full interest payment to you, your 1099-INT will include that accrued portion even though part of it was really the seller’s income. To avoid paying tax on someone else’s interest, subtract the accrued amount you paid on Schedule B, labeled “Accrued Interest” below your interest subtotal.8Internal Revenue Service. Instructions for Schedule B (Form 1040)
Original Issue Discount
When a bond is issued at a price below its face value, zero-coupon bonds being the classic example, the difference between what you paid and what you’ll receive at maturity is interest income. You generally must report a portion each year as it accrues, not just when the bond matures.9Internal Revenue Service. Guide to Original Issue Discount (OID) Instruments You’ll receive Form 1099-OID for these instruments. CDs that defer interest for more than one year also fall under OID rules.
Early CD Withdrawal Penalty
Report the full amount of interest credited to you during the year on Schedule B. The penalty the bank charges for the early withdrawal is deductible separately as an adjustment to income on Form 1040, so you get the deduction without reducing the interest figure itself.10Internal Revenue Service. Publication 550, Investment Income and Expenses
Private Loans to Friends or Family
If you lend money privately, the interest the borrower pays you is taxable, and you won’t get a 1099-INT for it. Track and report it yourself. Only the interest portion of each payment is income; principal repayments are just a return of your own money.
The IRS imposes minimum interest rate requirements on private loans through the Applicable Federal Rate, published monthly.11Internal Revenue Service. Applicable Federal Rates Charge less than the AFR and the IRS treats the difference between what you collected and what you should have collected as imputed interest, taxable to you even though you never received it. For gift loans under $10,000, this rule doesn’t apply as long as the borrower doesn’t use the funds to purchase income-producing assets.12Office of the Law Revision Counsel. 26 U.S. Code 7872 – Treatment of Loans With Below-Market Interest Rates Above that threshold, imputed interest rules apply, and for larger loans the forgone interest can also be treated as a taxable gift, potentially triggering a Form 709 filing.13Internal Revenue Service. Instructions for Form 709
Seller-Financed Mortgages
If you carry a mortgage for a buyer who uses the property as a personal residence, report the interest on Schedule B and include the buyer’s name, address, and Social Security number. You also share your own SSN with the buyer. Skipping this disclosure carries a $50 penalty.8Internal Revenue Service. Instructions for Schedule B (Form 1040)
A Child’s Interest Income
You may be able to include a child’s interest and dividend income on your own return using Form 8814 rather than filing a separate return for the child. The child must be under 19 (or under 24 if a full-time student), their income must consist only of interest and dividends, and their gross income must be less than $13,500 for 2025.14Internal Revenue Service. Instructions for Form 8814 The first $1,350 of the child’s investment income is tax-free when reported this way, but amounts above that are taxed at your rate, which is almost certainly higher than the child’s. For a child with investment income near the ceiling, filing a separate return for the child often produces a lower combined bill. Run the numbers both ways.
Foreign Account Interest
Interest earned in foreign bank accounts is taxable in the United States just like domestic interest, and it goes on Line 2b and Schedule B the same way. Foreign accounts also come with separate reporting obligations that carry severe penalties for noncompliance.
If the combined value of all your foreign financial accounts exceeds $10,000 at any point during the year, file a Report of Foreign Bank and Financial Accounts (FinCEN Form 114, the FBAR) electronically through the BSA E-Filing System by April 15, with an automatic extension to October 15.15Financial Crimes Enforcement Network. Report Foreign Bank and Financial Accounts This is a separate filing with a separate agency, not part of your tax return. Non-willful violations can result in penalties up to $10,000 per year, and willful violations carry penalties that can reach 50% of the account balance.
You may also need Form 8938 (Statement of Specified Foreign Financial Assets) attached to your tax return if your foreign assets exceed higher thresholds. For single filers living in the U.S., that’s $50,000 on the last day of the tax year or $75,000 at any point during the year. For married couples filing jointly, those thresholds double to $100,000 and $150,000.16Internal Revenue Service. Do I Need to File Form 8938, Statement of Specified Foreign Financial Assets The FBAR and Form 8938 have overlapping but not identical requirements, and you may owe both.
Backup Withholding on Your 1099-INT
If you didn’t give your bank a correct taxpayer identification number, or if the IRS told the payer you previously underreported interest or dividend income, the institution withholds 24% of your interest payments and sends it to the IRS.17Internal Revenue Service. Topic No. 307, Backup Withholding That amount appears in Box 4 of your 1099-INT. It’s a prepayment, not an extra tax, and it gets credited against your tax bill when you file. Claim the credit or you’re effectively paying that tax twice.
Penalties for Underreporting
The IRS matches 1099-INTs against returns using automated systems, and mismatches produce notices. If you underreport, the typical consequence is an accuracy-related penalty of 20% of the underpayment plus interest on the unpaid tax that accrues from the original due date until you pay.18Internal Revenue Service. Accuracy-Related Penalty For larger discrepancies, the failure-to-pay penalty adds 0.5% per month on the unpaid balance, up to a maximum of 25%.19Internal Revenue Service. Section 10 – Penalties and Interest Provisions The IRS also charges interest on the penalties themselves, and the time and professional fees involved in responding to notices add up quickly. Reporting every source, including the small ones without a 1099, avoids all of it.
Records to Keep After You File
The IRS recommends keeping records that support your income for at least three years after filing. If you underreport income by more than 25% of gross income shown on your return, the statute of limitations extends to six years. If you don’t file at all, there’s no time limit.20Internal Revenue Service. How Long Should I Keep Records
For interest income specifically, keep every 1099-INT and 1099-OID, bank and brokerage statements showing interest credits, loan agreements for any private lending, and records of accrued interest paid on bond purchases. Digital copies are fine if they’re legible and backed up. If you’re earning interest from foreign accounts, keep FBAR and Form 8938 records for at least six years from the filing deadline; the FBAR has its own retention period separate from your tax return.