Interest is compensation for the use of money. It is generally earned from deposit accounts, investments, loans, and certain financial instruments. Most payors issue Form 1099‑INT when they pay $10 or more of interest. Partnerships, S corporations, estates, and trusts may report interest on Schedule K‑1.
Taxable Interest
Taxable interest includes income from:
- Bank accounts
- Certificates of deposit
- U.S. Treasury bills, notes, and bonds (federally taxable, state/local exempt)
- Loans to others
- Promotional gifts for opening accounts ($10+ or $20+ for large deposits)
- Interest on tax refunds
- Savings bond interest
Savings Bonds
- Series H/HH — report semiannual interest when received
- Series I, E, EE — interest accrues until maturity
- Cash‑basis taxpayers may defer until maturity
- Accrual‑basis taxpayers must report annually
Education Savings Bond Program
Interest from Series I or EE bonds may be excluded if used for qualified education expenses in the same year. Requires Form 8815. Not available for married filing separately.
Nominee Interest
A taxpayer may receive a Form 1099‑INT for interest that actually belongs to someone else. This is nominee interest.
If you received nominee interest
You must:
- Issue a Form 1099‑INT to the actual owner (unless spouse)
- File that Form 1099‑INT with Form 1096
- Furnish Copy B to the actual owner
- Report the full interest on Schedule B
- Subtract the nominee portion as “Nominee Distribution”
If someone received nominee interest for you
They will issue you a Form 1099‑INT showing your share.
Nominee Dividends
Same rules apply using Form 1099‑DIV.
Seller‑Financed Mortgage Interest
If a taxpayer sells property and finances the buyer’s purchase, interest received is reported on Schedule B.
The seller must list:
- Buyer’s name
- Buyer’s address
- Buyer’s SSN
This applies when the buyer uses the property as a personal residence.
Original Issue Discount (OID)
OID is a form of interest. It arises when a debt instrument is issued for less than its stated redemption price at maturity.
Taxpayers must include OID in income as it accrues, even if no payments are received.
De Minimis OID
OID is treated as zero if:
If de minimis, the discount is capital gain at maturity.
Short‑Term Obligations
OID rules generally do not apply to obligations with a maturity of one year or less.
Exceptions to OID Reporting
OID rules do not apply to:
- Tax‑exempt obligations
- U.S. savings bonds
- Short‑term debt instruments (≤ 1 year)
- Obligations issued by individuals before March 2, 1984
- Loans between individuals when:
- Lender is not in the business of lending
- Total loans ≤ $10,000
- Tax avoidance is not a principal purpose