4.12 Reporting Interest on Your Tax Return
You must report all taxable interest. Forms 1099-INT, sent by payers of interest income, give you the amount of interest to enter on your tax return. Although they are generally correct, you should check for mistakes, notify payers of any error, and request a new form marked “corrected.” If tax was withheld (26.12), claim this tax as a payment on your tax return. The IRS will check interest reported on your return against the Forms 1099-INT sent by banks and other payers. If you earn over $1,500 of taxable interest, you list the payers of interest on Part I of Schedule B if you file either Form 1040 or Form 1040A. Form 1040EZ may not be used if your taxable interest exceeds $1,500. You must also list tax-exempt interest on your return even though it is not taxable.
You must report interest that has been shown on a Form 1099-INT in your name although it may not be taxable to you. For example, you may have received interest as a nominee or as accrued interest on bonds bought between interest dates. In these cases, list the amounts reported on Form 1099 along with your other interest income on Schedule B (Form 1040 or Form 1040A). On a separate line, label the amount as “Nominee distribution,” or “Accrued interest” (4.15), and subtract it from the total interest shown. Accrued interest is discussed below. Nominee distributions are discussed below under “Joint Accounts.”
If you received interest on a frozen account (4.13), include the interest from Form 1099 on Schedule B if you file Form 1040, or on Schedule 1 if you use Form 1040A. On a separate line, write “frozen deposits” and subtract the amount from the total interest reported.
You generally do not have to list the payers of interest if your interest receipts are $1,500 or less. However, complete Part I of Schedule B if you have to reduce the interest shown on Form 1099 by nontaxable amounts such as accrued interest, tax-exempt interest, nominee distributions, frozen deposit interest, amortized bond premium, or excludable interest on savings bonds used for tuition.
Caution
Joint accounts.
Form 1099-INT will be sent to the joint owner whose name and Social Security number was reported to the bank (or other payer) on Form W-9 when the account was opened. If you receive a Form 1099-INT for interest on an account you own with someone other than your spouse, you should file a nominee Form 1099-INT with the IRS to indicate that person’s share of the interest, together with Form 1096 (“Transmittal of Information Return”). Give a copy of the Form 1099-INT to the other person. When you file your own return, you report the total interest shown on Form 1099-INT and then subtract the other person’s share so you are taxed only on your portion of the interest; see the Example below.
Do not follow this procedure if you contributed all of the funds and set up the joint account merely as a “convenience” account to allow the other person to automatically inherit the account when you die. In this case, you report all of the interest income.
Filing Instruction
Savings certificates, deferred interest.
The interest element on certificates of deposit and similar plans of more than one year is treated as deferred interest original issue discount (OID) and is taxable on an annual basis. The bank notifies you of the taxable OID amount on Form 1099-OID. If you discontinue a savings plan before maturity, you may have a loss deduction for forfeited interest, which is listed on Form 1099-INT or Form 1099-OID (4.16).
Tax on interest can be deferred in some cases on a savings certificate with a term of one year or less. Interest is taxable in the year it is available for withdrawal without substantial penalty. Where you invest in a six-month certificate before July 1, the entire amount of interest is paid by the end of the year and is taxable in that year (the year of payment). However, when you invest in a six-month certificate after June 30, only interest actually paid or made available for withdrawal before the end of the year without substantial penalty is taxable in the year of issuance. The balance is taxable in the year of maturity. You can defer interest to the following year by investing in a six-month certificate after June 30, provided the payment of interest is specifically deferred to the year of maturity by the terms of the certificate. Similarly, interest may be deferred to the following year by investing in longer term certificates of up to one year, provided that the crediting of interest is specifically deferred until the year of maturity.
Accrued interest on a bond bought between interest payment dates.
Interest accrued between interest payment dates is part of the purchase price of the bond. This amount is taxable to the seller as explained in 4.15. If you purchased a bond and received a Form 1099-INT that includes accrued interest on a bond, include the interest on Line 1 of Schedule B, Form 1040, and then on a separate line above Line 2 subtract the accrued interest from the Line 1 total.
Custodian account of a minor (Uniform Transfers to Minors Act).
The interest is taxable to the child if his or her name and Social Security number were provided to the payer on Form W-9. However, if the child has net investment income for 2012 over $1,900, the “kiddie tax” (24.2) probably applies, in which case the excess over $1,900 is subject to tax at the parent’s top tax rate.