Most interest income is taxable as ordinary income on your federal tax return, and is therefore subject to ordinary income tax rates. There are a few exceptions, however.
Generally speaking, most interest is considered taxable at the time you receive it or can withdraw it.
Interest taxed as ordinary income
Typically, most interest is taxed at the same federal tax rate as your earned income, including:
- Interest on deposit accounts, such as checking and savings accounts.
- Interest on the value of gifts given for opening an account.
- Distributions commonly known as “dividends” on deposit or share accounts in credit unions, cooperative banks, and other banking associations.
- Interest on loans you make to others.
- Interest on certificates of deposit (CDs).
- Interest on U.S. obligations (except municipal bonds; U.S. Treasury bonds are federally taxable but not at the state level).
- Interest on insurance dividends or increased value in prepaid insurance premiums you withdraw.
- Interest on an annuity contract.
- Original issue discount (OID) amounts on long-term debt instruments.
- Interest on income tax refunds.
Distributions from money market funds are typically reported as dividends, not interest.
Interest that may be exempt from federal income tax
- Municipal bond interest (may also be exempt from state tax if issued in your state of residence)
- Private activity bonds (under the regular tax system, but may be taxable under the alternative minimum tax [AMT])
- Exempt-interest dividends from a mutual fund or other regulated investment company
Deferred interest income
If you hold any fixed-income instruments to maturity, you can report the interest when it is paid upon maturity. With some U.S. savings bonds and in certain other cases, you may wish to use the accrual method, where you report the interest as it accrues, even if you do not receive it, rather than using the more common cash method.
OID amounts should be reported as they accrue.
You do not need to report interest earned on tax-deferred accounts, such as Traditional IRAs or 401(k)s, until you withdraw the earnings.
Reporting interest income on your tax return
Taxable and tax-exempt interest is reported on Form 1099-INT, part of your consolidated tax reporting statement from Fidelity. Even if you do not receive Form 1099-INT from other sources, you must report any taxable interest income on your tax return.
1099-OID reports any taxable OID and is also included in your Fidelity tax reporting statement; be sure to add these amounts to your taxable interest.
You should report tax-exempt and taxable interest on your income tax return (lines 2a and 2b of the 1040). You may also be required to file Schedule B, if your taxable income is more than $1,500 or under certain other conditions (see the form instructions).
If you are required to file Form 6251 for alternative minimum tax, you should report private activity bond interest there.
These are the most common scenarios for interest reporting on your federal income tax return; consult your tax advisor for your specific situation.
FAQs
Interest taxed as ordinary income
Do you have to pay taxes on interest income? ›
Key Takeaways
Interest on bonds, mutual funds, CDs, and demand deposits of $10 or more is taxable. Taxable interest is taxed just like ordinary income. Payors must file Form 1099-INT and send a copy to the recipient by January 31 each year. Interest income must be documented on Schedule B of IRS Form 1040.
What is Fidelity interest income? ›
The Interest Income page and related detail pages provide a summary of interest earned on government and corporate debt obligations and short-term certificates of deposit, as well as interest earned from cash awaiting reinvestment in a Fidelity Brokerage account.
Do I have to pay taxes on my Fidelity account? ›
If you hold shares in a taxable account, you are required to pay taxes on mutual fund distributions, whether the distributions are paid out in cash or reinvested in additional shares. The funds report distributions to shareholders on IRS Form 1099-DIV after the end of each calendar year.
Do I have to report interest income less than $10? ›
Even if you did not receive a Form 1099-INT, or if you received $10 or less in interest for the tax year, you are still required to report any interest earned and credited to your account during the year. The payer's identification number and address are not needed.
What if I have more than $1500 in taxable interest income? ›
Schedule B is an IRS tax form that must be completed if a taxpayer receives interest income and/or ordinary dividends over the course of the year of more than $1,500. The schedule must accompany a taxpayer's Form 1040. Taxpayers use information from Forms 1099-INT and 1099-DIV to complete Schedule B.
How to avoid taxes on interest income? ›
Strategies to avoid paying taxes on your savings
- Leverage tax-advantaged accounts. Tax-advantaged accounts like the Roth IRA can provide an avenue for tax-free growth on qualified withdrawals. ...
- Optimize tax deductions. ...
- Focus on strategic timing of withdrawals. ...
- Consider diversifying with tax-efficient investments.
Withdraw too little and you may not live the life you want to in retirement. Our guideline is to limit withdrawals to 4% to 5% of your initial retirement savings,4 then keep increasing this withdrawal based on inflation. Read Viewpoints on Fidelity.com: How can I make my savings last?
What is tax-exempt interest income? ›
Tax-exempt interest refers to interest income that is not subject to taxation, most notably at the federal level. Some municipal bonds may also be "triple-exempt", where tax is not paid at the federal, state, nor local level.
Does cash in a Fidelity account earn interest? ›
Yes, the Fidelity Cash Management Account pays interest. It currently has a 2.72% APY, which is much higher than the national average interest checking rate of May 20, 2024, according to the FDIC).
If you receive a Form 1099-INT and do not report the interest on your tax return, the IRS will likely send you a CP2000, Underreported Income notice. This IRS notice will propose additional tax, penalties and interest on your interest payments and any other unreported income.
Does Fidelity automatically deduct taxes? ›
For Fidelity Advisor Traditional, Rollover, SIMPLE, and SEP/SARSEP-IRAs: IRS regulations require us to withhold federal income tax at the rate of 10% from your IRA distribution(s) unless you elect NOT to have withholding apply by indicating this on your distribution request.
Is it safe to have all my money at Fidelity? ›
Protecting your assets
With our Customer Protection Guarantee, we reimburse you for losses from unauthorized activity in your accounts. We also participate in asset protection programs such as FDIC and SIPC to help provide the best service possible.
Will the IRS catch a missing 1099-INT? ›
The IRS employs various methods to detect discrepancies in tax reporting, including the absence of 1099 forms. While the IRS does not catch every missing 1099 immediately, their sophisticated systems and data-matching capabilities make it likely that discrepancies will be identified over time.
Do I need to file taxes if I only have interest income? ›
You must report all taxable and tax-exempt interest on your federal income tax return, even if you don't receive a Form 1099-INT or Form 1099-OID. You must give the payer of interest income your correct taxpayer identification number; otherwise, you may be subject to a penalty and backup withholding.
How much tax will I pay on interest income? ›
Typically, most interest is taxed at the same federal tax rate as your earned income, including: Interest on deposit accounts, such as checking and savings accounts. Interest on the value of gifts given for opening an account.
How much interest can I earn without paying taxes? ›
You must report any interest earned on a savings account, even if it's less than $10. Interest from a savings account is considered an addition to your taxable income for the year in which it is paid.
What income is not federally taxable? ›
Disability and worker's compensation payments are generally nontaxable. Supplemental Security Income payments are also tax-exempt. Disability compensation or pension payments from the Department of Veterans Affairs to U.S. military Veterans are tax-free as well.
Does interest income count as earned income? ›
Interest income is considered unearned income.
How much tax do I pay on savings account interest? ›
How Much Is Tax for Savings Accounts?
| Tax Rate | For Single Filers | For Heads of Households |
|---|
| 10% | $0 to $11,000 | $0 to $15,700 |
| 12% | $11,000 to $44,725 | $15,700 to $59,850 |
| 22% | $44,725 to $95,375 | $59,850 to $95,350 |
| 24% | $95,375 to $182,100 | $95,350 to $182,100 |
3 more rowsNov 7, 2023
