Tax Tips

Most interest that you receive, and can be withdrawn, is taxable income. Examples of taxable interest are interest on bank accounts, money market accounts and deposited insurance dividends. If you receive taxable interest, you may have to pay estimated tax.

Interest on insurance dividends you leave on deposit with the Department of Veterans Affairs, however, is not taxable.

Generally, you don't have to report interest on Series EE and Series I U.S. Savings bonds until you redeem or dispose of the bonds, or they mature, but it may be advantageous to report the interest annually if you expect to be in a higher tax bracket when you redeem the bonds. Interest from such bonds issued after 1989 may be excluded from income if you pay qualified higher educational expenses during the year and meet other requirements.

Certain distributions commonly referred to as dividends are actually interest. They include "dividends" on deposits or share accounts in cooperative banks, credit unions, domestic savings and loan associations, federal savings and loan associations, and mutual savings banks.

If you have a bond, note, or other debt instrument that was originally issued at a discount, part of the original issue discount may have to be included in your income each year as interest.

You must show the amount of any tax-exempt interest you received during the tax year. This is an information reporting requirement only, and does not convert tax-exempt interest to taxable interest. You should receive a Form 1099-INT, Form 1099-OID or a similar statement from each payer of interest of $10 or more, showing the interest you must report. Form 1099-INT also will show any tax-exempt interest that is taxable for the Alternative Minimum Tax. Enter such interest only on Form 6251.