Interest Income

Interest from bank accounts or accounts at other financial institutions, certificates of deposits, and bonds should be reported to you by the payer on Form 1099-INT. These forms should be sent out by the end of January.

Tip

If you receive an incorrect 1099 form, you should contact the financial institution involved and ask them to issue a corrected one. Copies of all 1099s are sent to the IRS and are matched with your tax return. Mix-ups are especially prone to occur if your bank completed a merger this year and, for example, your bank accounts were reported to the IRS under a different bank's name than the one you used on your tax return, or if you had multiple accounts at a single bank and they were not all reported on the same 1099.

As a general rule, if you are required to file Schedule B or Schedule 1, every total shown in Box 1 of every 1099 that you receive should appear on your tax form somewhere, so that the IRS knows you are reporting it. If your institution reported multiple accounts on the same form, you should report them the same way. If they sent you separate 1099 forms for different accounts, report them separately.

If you received $1,500 or less in interest from all sources and none of the special situations described below apply to you, you don't have to file a separate schedule reporting interest, although you can if you wish.

If you do receive more than $1,500 in taxable interest, you must complete Parts I and III of Schedule B (for Form 1040) or Part I of Schedule 1 (for 1040A).

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If any federal income tax was withheld on your interest income, it will be reported in Box 4 of Form 1099-INT. Be sure to include this as "federal income tax withheld" on Line 64 on the back of your 1040, or Line 39 on the 1040A. You can generally avoid backup withholding (which is set at 28 percent in 2007) if you provide your financial institution with an accurate Social Security number for the owner of the account.

What is interest anyway? The IRS draws the line between dividends and interest in sometimes unexpected ways.
Penalties on early withdrawals of savings require special reporting.
Special situations can arise which trigger additional rules.
Savings bonds used to pay higher education expenses qualify for a special tax break.

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