Interest Income: Types, Distinctions & Taxation

Instructor: Morgan Gannarelli
In this lesson, we will explain the types of interest income such as interest from corporate bonds, savings accounts, and municipal bonds. We will also discuss how interest income is taxed.

Interest Income

What is interest income? Well, you earn interest income when you receive interest payments from corporate bonds, savings accounts, or municipal bonds, just to name a few. Basically, it is revenue from interest earned on assets. The interest can be paid out monthly, quarterly, or annually. It is important to keep records of the interest income you receive. This will make tax time much easier. It can be quite complex, but many companies send out reports on a monthly or annual basis of the amount of interest income you have received.

This income may be subject to the ordinary income tax rates. Some interest may be partially taxable while other types are fully taxable. The interest income becomes taxable when it is paid to you, but you may be able to defer the interest income to a future year if needed. The interest income is reported on the Form 1040 and then summed up using a Schedule B form. A Schedule B is mandatory if you have over $1,500 in interest and/or dividends. You will also receive a 1099-INT which reports interest earned and whether any taxes have been withheld on your interest income.

Types of Interest Income

Corporate Bonds

One type of interest producing instrument a corporate bond, which is a debt security issued to investors from a corporation. These types of bonds typically have more risk than government bonds, which means they also offer higher interest rates. When the interest is paid out to you, it needs to be reported, as it is subject to federal income tax and state income tax if applicable. (Some states do not have a state income tax). So, let's say that you received $5,000 of interest income from your corporate bond. That income is fully taxable and would be reported on the Form 1040 when filing your taxes.

Savings Accounts

Another type of interest income comes from a savings account. If you receive more than $10 of interest income you will receive a Form 1099-INT. This income is subject to your marginal tax rate, which can be as low as 10% or as high as 39.6%. If you have multiple savings accounts, you will need to report interest income from all accounts that are in your name. This income, along with all forms of interest income, is not subject to other types of taxation like Social Security and Medicare taxes.

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