Interest Income

Question 1

What is taxable interest?

Answer 1

Taxable interest includes earnings from deposit accounts, investments, and loans. Taxpayers generally receive Form 1099-INT if they earn $10 or more in interest.

Question 2

What are examples of taxable interest income?

Answer 2

Examples include:
• Bank, savings, and credit union accounts
• Certificates of deposit
• U.S. Treasury bills, notes, and bonds (exempt from state and local taxes)
• Loans made to others
• Interest on tax refunds
• U.S. Savings Bonds (e.g., Series H, HH, I, E, and EE)

Question 3

What is a special note regarding Series I or EE bonds?

Answer 3

Series I or EE bonds used for qualified education expenses may be tax-free. Taxpayers use Form 8815 to calculate the exclusion.

Question 4

What must nominees do when receiving interest on behalf of someone else?

Answer 4

Nominees must:
1. Provide the actual owner with Form 1099-INT (unless it’s their spouse).
2. File Form 1099-INT and Form 1096 with the IRS.
3. Report the total interest income on Schedule B, subtract the portion belonging to someone else, and label it as ‘Nominee Distribution.’

Question 5

What must taxpayers report for seller-financed mortgages?

Answer 5

Taxpayers must report the interest on Schedule B and include the buyer’s name, address, and Social Security Number.

Question 6

What is Original Issue Discount (OID)?

Answer 6

OID is a form of interest earned from debt instruments sold at a discount (e.g., zero-coupon bonds). Taxpayers report OID income as it accrues over the term of the instrument.

Question 7

What is the De Minimis Rule regarding OID?

Answer 7

OID is treated as zero if the discount is less than 0.25% of the redemption price multiplied by the number of years to maturity.

Question 8

What types of obligations do OID rules not apply to?

Answer 8

OID rules do not apply to:
• Tax-exempt obligations
• U.S. Savings Bonds
• Short-term debts (maturity ≤1 year)
• Certain personal loans under $10,000