What Is Taxable Interest ?

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Any interest that you receive or that is credited into your account and can be withdrawn is termed as taxable interest. This interest is treated as taxable income and you have to report it on your tax return. Interests you receive from bank accounts, loans you make out to other, or interest from any other source is considered to be taxable interest.     

Which ever source is paying you interest, like bank accounts or mutual funds, you should provide the source with your correct social security number. If you do not do this, it is quite likely that you will have to pay a tax penalty along paying backup taxes for the amount from when you first received it.

Most paying institutions will send you form 1099-INT for interest income and form 1099-OID for original issue discount. You will receive documents from all the paying institutions that are sending you interest. In case the interest amount is $10 or more, the institution is required to inform the IRS with the information for tax purposes.

In general all financial institutions inform the IRS of all interest that is paid out. If you do not include your taxable interest in your tax return, the IRS will know that you are lying or withholding taxes as they already have the information. The IRS will send you a letter requesting you to pay additional taxes, interest and penalties that you owe on the taxable interest.

If your taxable interest is $1,500 or less, you need to show this on line 8a of form 1040 or form 1040A, or on line 2 if you are using form 1040EZ. If your taxable interest is more than $1,500, you have to file your taxes using either form 1040 or 1040A. In this case you cannot use form 1040EZ. You should state your taxable interest on the form 1040 Schedule B or form 1040A Schedule 1.