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What Is Interest Income?

A 1099-INT or 1099-DIV form is required when a person earns more than $10.00 of interest to report this income to the IRS.
Some savings accounts accrue interest for the account owner.
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  • Written By: Mary McMahon
  • Edited By: O. Wallace
  • Last Modified Date: 06 April 2014
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Interest income is income earned in the form of interest that accumulates on investments. A classic example is the interest paid to the holder of a certificate of deposit. Savings accounts, dividends, and shares in credit unions can also generate interest. As a general rule, this type of income is treated as taxable, and it must be reported on income tax filings to avoid legal penalties.

When someone earns income from interest, the financial institution is responsible for issuing a form stating this. In the United States, this form is the 1099-INT or 1099-DIV, and it will be issued in any case where someone has earned more than $10 US Dollars (USD). If less than this amount was earned, it still needs to be reported. People can report interest income directly on their tax forms in some cases, while in the instance of larger payments, they will need to file what is known as a Schedule B.

The government treats interest as taxable because they view it as income: the bank pays the interest into an account, and the account-holder can choose to withdraw that interest. It can also be sizable in the case of big deposits, and in fact, some people successfully live on the interest from their investment accounts. There are certain circumstances in which the income may be non-taxable or taxable at a reduced rate, and taxpayers should discuss this with their accountants.

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If a form reporting interest income is incorrect, the taxpayer needs to contact the financial institution to request a correction. These forms are reported to the government as well as the taxpayer, and inconsistencies will raise eyebrows. When requesting an amended form, taxpayers should be prepared to provide documentation and support such as bank statements showing that the report is wrong.

Errors on tax returns do occur, and taxpayers should know that government agencies are usually forgiving about mistakes, as long as they were obviously made in good faith, and the taxpayer demonstrates a desire to correct them. Using an experienced accountant can reduce the probability of errors, and if a problem is spotted, it should be reported properly to demonstrate that the taxpayer is aware and is taking steps to address the issue. Over or underpayment on interest income is a common tax mistake, especially in the case of people with interest accruing on multiple accounts, and individuals who are not sure about which accounts are generating taxable interest.

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Discuss this Article

latte31
Post 4

Cupcake15-I also have income funds and also get statements from the fund family regarding the earnings.

This is purely investment income. But a while back I had a REIT investment, which was a real estate investment trust fund.

I invested in an REIT index fund that was an income producing assets that reinvested 90% of the profits from the real estate holdings.

This income was also taxable as well because the 4% yield that I received at the time was part of the funds earnings.

cupcake15
Post 3

Comfyshoes-That sounds like a great investment. I wanted to add that dividends are a form of interest payments that are taxable.

At the end of the year, the company in which you are a shareholder of will send you a 1099 interest income document for tax purposes.

You will also receive this document from a bank as well, if you hold CD’s or other interest bearing accounts.

Elfie64- I think if you are concerned about income, you might want to look into dividend funds or municipal bonds.

comfyshoes
Post 2

Interest income is additional income that is offered on an investment. Some investments offer tax free income.

For example, municipal bond interest income is totally tax free. Municipal bonds are bonds that invest in municipalities. In order to encourage investment in city government, the federal government allows income from municipal bonds to be tax free.

A semi annual interest payment is offered based on the yield of the bond. For example if you invest $500,000 in municipal bonds, your semi annual interest payment is $12,500 on a 5% yield.

This income is not included in your gross income, which is why people with high disposable incomes are attracted to municipal bonds. This tax free interest income makes the most of your money.

In order to buy municipal bonds, you really need to talk to a broker because they can be complicated investments. It is best to focus on general obligation bonds, but a broker can have you assess the appropriate risk.

elfi64
Post 1

Interest income can fluctuate significantly from year to year. It is a very nice way to earn money, but it is not fully reliable, because in the years when the interest rates are low, interest income can drop significantly.

It is definitely a good idea to have a variety of income sources.

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