Generally speaking, most interest is considered taxable at the time you receive it or can withdraw it.
Interest taxed as ordinary income
Typically, most interest is taxed at the same federal tax rate as your earned income, including:
- Interest on deposit accounts, such as checking and savings accounts.
- Interest on the value of gifts given for opening an account.
- Distributions commonly known as “dividends” on deposit or share accounts in credit unions, cooperative banks, and other banking associations.
- Interest on loans you make to others.
- Interest on certificates of deposit (CDs).
- Interest on U.S. obligations (except municipal bonds; U.S. Treasury bonds are federally taxable but not at the state level).
- Interest on insurance dividends or increased value in prepaid insurance premiums you withdraw.
- Interest on an annuity contract.
- Original issue discount (OID) amounts on long-term debt instruments.
- Interest on income tax refunds.
Distributions from money market funds are typically reported as dividends, not interest.
Interest that may be exempt from federal income tax
- Municipal bond interest (may also be exempt from state tax if issued in your state of residence)
- Private activity bonds (under the regular tax system, but may be taxable under the alternative minimum tax [AMT])
- Exempt-interest dividends from a mutual fund or other regulated investment company
Deferred interest income
If you hold any fixed-income instruments to maturity, you can report the interest when it is paid upon maturity. With some U.S. savings bonds and in certain other cases, you may wish to use the accrual method, where you report the interest as it accrues, even if you do not receive it, rather than using the more common cash method.
OID amounts should be reported as they accrue.
You do not need to report interest earned on tax-deferred accounts, such as Traditional IRAs or 401(k)s, until you withdraw the earnings.
Reporting interest income on your tax return
Taxable and tax-exempt interest is reported on Form 1099-INT, part of your consolidated tax reporting statement from Fidelity. Even if you do not receive Form 1099-INT from other sources, you must report any taxable interest income on your tax return.
1099-OID reports any taxable OID and is also included in your Fidelity tax reporting statement; be sure to add these amounts to your taxable interest.
You should report taxable interest and tax-exempt bond interest on your income tax return (lines 8a and 8b of the 1040). You may also be required to file Schedule B, if your taxable income is more than $1,500 or under certain other conditions (see the form instructions).
If you are required to file Form 6251 for alternative minimum tax, you should report private activity bond interest there.
These are the most common scenarios for interest reporting on your federal income tax return; consult your tax advisor for your specific situation.