It’s a standard for everyone: You report your income when you file taxes. And for Uncle Sam, money is money, whether it’s wages or interest from bank accounts.
That interest could be a few bucks if your savings account is with a big bank, where interest rates tend to be near 0.06%, or more with a high-yield savings account, where rates can reach 1% or above.
Whatever the case, reporting that interest is required, and it will take you only an extra step or two. Here’s what to know.
What bank interest is taxable?
Any interest you receive from a bank account is taxable income, whether it's a checking or savings account or a certificate of deposit. And it’s taxed at the same rate as your wages.
But do you have to report interest if it’s just pennies?
“Technically, yes, even if it’s a few pennies,” says Carrie Houchins-Witt, a certified tax professional in Coralville, Iowa.
“However, the IRS does allow you to round to whole numbers, so if it’s less than 50 cents, you could not claim it and still be following the rules,” she adds.
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What about other interest?
Outside of basic bank accounts, you might get money from sources such as savings bonds or investment accounts, including retirement plans. Although they count as taxable income, too, these are handled differently, and you may need a tax professional to help you.
Getting the paperwork: 1099-INTs
It‘s important to report checking or savings interest on your tax return, especially if you receive a 1099-INT form from your bank. The 1099-INT is a short document that shows the interest you received from a financial institution during the previous year. Credit unions call bank interest “dividends,” but they still count as interest on a 1099-INT.
Banks are required to send a 1099-INT only to account holders who received $10 or more in interest. If you got less than that, you may not get the form. In that case, you can find the amount of interest you received on bank statements from last year.
Where do I report it?
On your federal tax return, you insert the total interest earned last year in one of three places:
- Line 8a of Form 1040
- Line 8a of Form 1040A
or
- Line 2 of Form 1040EZ
You fill out only one of these. If you earn more than $1,500 in interest, you must use Form 1040 and complete another form called Schedule B. It’s a form for listing all banks or companies that paid you interest last year, and you’ll send it in with Form 1040.
The IRS will get a copy of the 1099-INT from your bank, so there’s no need to include that with your tax return.
What happens if I forget to report interest?
“If a 1099-INT has been issued, the IRS knows that,” Houchins-Witt says. “They’ll do computer matching on tax returns.”
And you might get hit with a small late-payment penalty for failing to claim interest income. If the IRS sends a notice, you typically have to pay a penalty of 0.5% of the tax owed. This charge is per month after the tax deadline — April 18 this year — and it includes the last half of April and the part of the month that the IRS sends you a letter.
So if you owe $100 in taxes on undeclared interest income and receive a notice on June 15, you’re looking at a fee of $1.50 for April, May and June. Ignoring further attempts from the IRS to collect can lead to an increased penalty of 1% of the tax owed per month. And if you keep avoiding it, the penalty can reach 25% per month — plus the actual tax you haven't paid. Other penalties can also apply, depending on your circ*mstances.
But you don't have to wait for the IRS to act if you forget to include interest as taxable income. Simply send in an amended tax return.
Report, no matter what
Reporting all income, no matter how small, is the rule.
- If you haven’t sent in taxes yet, gather any 1099-INTs and include your total interest on your tax return.
- If you forgot and already sent in your return, send in an amended return or wait for a letter from the IRS.
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Spencer Tierney is a staff writer at NerdWallet, a personal finance website. Email:spencer@nerdwallet.com. Twitter:@SpencerNerd.
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