Any interest paid to you or credited to an account is considered taxable income when you can withdraw the amount without facing any penalties. It becomes taxable the year in which it is available to you. Sometimes, interest you receive may be considered tax-exempt. You’ll receive a Form 1099-INT or Form 1099-OID if you have received interest in amounts greater than $10 which will state the correct amount of taxable and tax-exempt interest reported. When complete ling your federal income tax return, you’ll need to report all taxable interest, regardless of whether or not you received a form 1099-INT or 1099-OID. The interest payer will need your taxpayer identification number so you avoid any penalties or backup withholdings.

Taxable interest can include:

• Bank accounts, money market account, certificates of deposit and deposited insurance dividends that have accrued interest. Dividend distributions are typically considered taxable as well, and can include dividends on deposits or on share accounts in cooperative banks, credit unions, domestic building and loan associations, domestic federal savings and loan associations, and mutual savings bank accounts.
• Interest accrued from Treasury notes, bonds and bills that is exempt from state or local taxes, but still taxed as income federally.
• Savings bond interest unless you’ve included the interest in income each year of the bond. In these cases, you won’t have to report the interest. If you don’t report the income each year, you’ll have to report interest when the bonds mature or are redeemed.

Nontaxable interest isn’t included in gross income. There are also interest exclusions which don’t require addition to income amounts. These include:

• Any interest from a Series EE or Series I bonds that were issued after 1989 and were used to pay for higher education. In these situations you must meet the requirements for the Educational Savings Bond Program. Interest that can be excluded under these circumstances is calculated on Form 8815 and will be reported on a Form 1040A.
• Interest on bonds purchased to finance government operations. These bonds must be issued by a state, the District of Columbia or a U.S. Territory. Interest will need to be reported as tax exempt throughout the year in order to comply with information reporting standards.
• Dividends from the U.S. Department of Veterans Affairs that has accrued interest is not taxable.

If notes, bonds, or other debt was issued at discount, it’s possible you may have to include interest in your income each year, at least as it pertains to the original discount.

If you receive a Form 1099 for interest that belongs to someone else, you may be considered a nominee recipient according to the IRS. In these cases, you’ll have to file with the IRS and have the original interest owner sent a Form 1099-INT. You’ll be required to report nominee interest on your Form 1040 when filing your taxes, and furnish the original owner with copy B of you Form 1099-INT. Check with your tax preparer or financial adviser for more information regarding nominee interest.