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
Most interest income is taxable as ordinary income on your federal tax return, and is therefore subject to ordinary income tax rates.
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.
How to avoid tax on interest income? ›
How To Avoid Tax From Savings Accounts
- Individual Retirement Accounts (IRAs). The interest you earn from a tax-deferred account like a traditional IRA isn't reported as income in the year that you earn it. ...
- 401(k). ...
- Roth IRAs. ...
- Health Savings Accounts (HSAs). ...
- 529 college savings plans.
Interest income from Treasury bills, notes and bonds - This interest is subject to federal income tax but is exempt from all state and local income taxes.
What if I have more than $1500 in taxable interest income? ›
Individuals who receive $1,500 or more in qualified interest or dividends during the tax year must complete the Schedule B tax schedule provided by the Internal Revenue Service (IRS) and attach it to their tax return.
Why is interest income not capital gains? ›
A capital gain is when an investment rises to a higher price than an investor paid. In contrast, investment income consists of payments such as dividends and interest as well as realized capital gains.
What is the 4% rule for Fidelity? ›
With the 4% Rule, you withdraw 4 percent of your portfolio value in the first year of retirement. The dollar amount of that withdrawal is then increased each year by the rate of inflation.
Do you pay taxes on Fidelity? ›
Distributions and your taxes
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.
What qualifies as tax-exempt interest income? ›
tax-exempt interest income — interest income that is not subject to income tax. Tax-exempt interest income is earned from bonds issued by states, cities, or counties and the District of Columbia.
What is the interest income tax loophole? ›
The current carried interest loophole allows these money managers to pay the lower 23.8 percent capital gains tax rate on income received as compensation, rather than the ordinary income tax rates of up to 40.8 percent that they would pay for the same amount of wage income.
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.
Does interest income count as earned income? ›
Interest income is considered unearned income.
How much tax will I pay on interest income? ›
Interest income and ordinary dividends (qualified dividends are taxed at capital gains rates) are taxed at the same rate as your ordinary income tax. For example, if your federal income tax rate is 22%, your interest income or dividends will also be taxed at 22%.
What happens if you don't report interest income? ›
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.
Do I have to pay taxes on savings account interest? ›
How Are Savings Accounts Taxed? The IRS treats interest earned on a savings account as earned income, meaning it can be taxed. So, if you received $125 in interest on a high-yield savings account in 2023, you're required to pay taxes on that interest when you file your federal tax return for the 2023 tax year.
Is interest taxable when paid? ›
Interest can in practice often be treated as arising when it becomes due and payable. However, if a taxpayer does not actually receive interest (or have it credited to an account) until a later date, it does not normally form part of his or her taxable income until it is received.
What type of income is non-taxable? ›
Nontaxable income won't be taxed, whether or not you enter it on your tax return. The following items are deemed nontaxable by the IRS: inheritances, gifts and bequests. cash rebates on items you purchase from a retailer, manufacturer or dealer.
Do you have to pay taxes on CD interest? ›
Key takeaways. Interest earned on CDs is considered taxable income by the IRS, regardless of whether the money is received in cash or reinvested. Interest earned on CDs with terms longer than one year must be reported and taxed every year, even if the CD cannot be cashed in until maturity.
