Tax: Interest Income

Interest income is interest earned or paid to your account, for example from corporate bonds, municipal bonds and unit trusts, for the year.

Interest that you receive may either be taxable or non-taxable (tax-exempt) income.  Taxable interest includes interest received from bank accounts and tax-exempt money market income.  Taxable amounts received from money market funds are reported as dividends.

Taxable interest is also received on US Treasury obligations such as Treasury bills, Treasury notes and Treasury bonds, and certain preferred securities. 

Tax-exempt interest includes exempt-interest dividends from a mutual fund or other regulated investment company (RIC) and interest on state and local government issued municipal bonds. Tax-exempt interest may be subject to the Alternative Minimum Tax (AMT).

If you have a bond, note or other debt instrument issued at a discount, part of the original issue discount (OID) may have to be included in income each year as interest as it accrues over the term of the debt instrument.  Refer to IRS Publication 1212, Guide to Original Issue Discount Instruments.

For general information, refer to IRS Publication 550, Investment Income and Expenses, and consult your tax advisor for more information. 

In compliance with Treasury Department Circular 230, unless stated to the contrary, any information contained in this FAQ was not intended or written to be used and cannot be used for the purpose of avoiding tax penalties that may be imposed on any taxpayer.

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