Does Interest Earned Count as Income?
Interest earned on savings accounts, certificates of deposit (CDs), and other investment vehicles is a common source of additional income for many individuals. However, the question of whether this interest is considered taxable income can be confusing. In this article, we will explore the tax implications of interest earned and provide some guidance on how to handle it.
Understanding Taxable Income
Interest earned is generally considered taxable income, but it is important to understand how it is taxed and when it becomes taxable. In the United States, interest income is subject to federal income tax, and in some cases, state income tax as well. The IRS defines taxable income as “all income from whatever source derived,” which includes interest earned on investments.
Reporting Interest Income
When you earn interest, your financial institution is required to report the amount of interest you earn to the IRS. This is done through Form 1099-INT, which you will receive by January 31 of the following year. It is important to keep this form, as it will be used to report your interest income on your tax return.
Reporting Interest on Your Tax Return
To report your interest income on your tax return, you will need to use Schedule B (Form 1040). This form will require you to enter the total amount of interest you earned during the year. If you earned interest from multiple sources, you will need to list each source separately.
Calculating Tax on Interest Income
The tax rate on interest income depends on your overall taxable income and your filing status. For most individuals, interest income is taxed at the same rate as your ordinary income. However, if you are in a lower tax bracket, you may be eligible for a lower rate on your interest income.
Exemptions and Deductions
While interest earned is generally taxable, there are some exceptions and deductions that may apply. For example, if you are in a lower income bracket, you may be eligible for the saver’s credit, which can reduce the tax on your interest income. Additionally, some types of interest, such as interest on municipal bonds, may be exempt from federal income tax.
Keeping Records
It is important to keep detailed records of your interest income, including the amount earned, the source of the income, and any deductions or exemptions that may apply. This will help you accurately report your income and ensure that you are paying the correct amount of tax.
Conclusion
In conclusion, interest earned is generally considered taxable income, but there are exceptions and deductions that may apply. It is important to understand the tax implications of your interest income and to report it accurately on your tax return. By keeping detailed records and staying informed about the tax laws, you can ensure that you are handling your interest income properly and minimizing your tax liability.
