Tax Tips: Things you need to know about interest income
NEW YORK - Forbes.com has teamed up with the authors of Ernst & Young Tax Guide 2006 to develop a series of tips to help you avoid paying more tax than necessary. The circumstances of your situation will determine if you qualify, so review the tax code and check with your tax adviser.
Here are 10 things you need to know about interest income.
1. Reporting Standards
Interest income is a significant portion of all income earned by Americans. Payers of interest, such as banks, are required to report to the government the amounts of interest they pay out and to whom. If you don't supply your Social Security Number to a bank, tax will be automatically withheld.
2. Form 1099-INT
Interest income is generally reported to you on Form 1099-NT, or a similar statement by banks, savings and loan associations and other payers of interest. This form shows you the interest you received during the year. Keep this form for your records, but you don't have to attach it to your tax return.
3. Exempt-Interest Dividends
Exempt-interest dividends you receive from a regulated investment company, such as a mutual fund, are not included in your taxable income. You will receive a notice from the mutual fund telling you the amount of the exempt-interest dividends that you received. Such dividends are not shown on Form 1099-DIV or Form 1099-INT.
4. Interest on VA Dividends
Interest on insurance dividends that you leave on deposit with the Department of Veterans Affairs are not taxable. This includes interest paid on dividends on converted U.S. Government Life Insurance and on National Service Life Insurance policies.
5. Dividends That Are Interest
You must report as interest so-called "dividends" on deposits or share accounts in cooperative banks, credit unions, domestic building and loan associations, domestic savings and loan associations, federal savings and loan associations, and mutual savings banks.
6. Money Market Funds
In general, amounts you receive from money market funds should be reported as dividends, not interest.
7. Annuity Contract
Accumulated interest on an annuity contract you sell before its maturity date is taxable.
8. Certificate Of Deposit
If you buy a CD with a maturity of more than a year, you must include as income each year a part of the total interest due. This applies to similar deposit arrangements, such as time deposits, bonus plans, savings certificates, deferred income certificates, bonus savings certificates, and growth savings certificates.
9. State Or Local Bonds
Interest on a bond used to finance government operations generally is not taxable if the bond is issued by a state, the District of Columbia, a possession of the United States or any of their political subdivisions. Bonds issued after 1982 by an Indian tribal government are treated as issued by the state, and interest on these bonds is generally tax-exempt if the proceeds are used for an essential government function.
10. How To Report
In general, you report all your taxable interest income to the IRS on Form 1040, line 8a; Form 1040A, line 8a; or Form 1040EZ, line 2. You cannot use form 1040EZ if your interest income is more than $1,500. Instead, you must use Form 1040 or 1040A.
— Source: Forbes.com
