With tax day looming overhead, most taxpayers have already received their statements regarding their annual income and wages from their employers and financial institutions. While most of us know about our annual salaries, how do we figure out what to pay on 'interest income' and what exactly is it?
Basically, it's any interest you earned or received on savings accounts, certificate of deposits and other investments. Around the beginning of each year, you should receive from payers yearly tax statements, called Form 1099-INT, in the mail. This summarizes your interest income. But, do these reports include everything?
In short, no. Payers are only required to report interest payments of $10 or more, but you are required to report all earnings on your tax return, even if it is less than $10. So, it's important that you keep a list showing sources and interest amounts that you receive throughout the year and report it when you file your taxes.
But not all interest is subject to tax. Some interest earned can be nontaxable or may be excluded from your income. For example, this may include interest redeemed from Series EE and I U.S. Savings Bonds issued after 1989 if used to pay for higher educational expenses. However, even though the interest is not taxable this does not mean it is not reportable.
So when should you report interest income on a U.S. Savings Bond? It depends on how you choose to report it. There are two methods. Most taxpayers choose the cash method where you report your interest income the year that you actually receive it. Just by having it credited to your account and made available to you are conditions for reporting it.
Alternatively the taxpayer can elect to recognize the annual increase in the value as interest income even if you haven't received it yet. Whichever method of reporting you choose, you'll need to stick to that method. If you want to change it for any reason, it generally requires IRS approval.
Overall, there are other rules regarding interest income, so it's always best to consult a tax professional for any questions.
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