Most interest income is taxable as ordinary income on your federal tax return, and is therefore subject to ordinary income tax rates. There are a few exceptions, however.
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 tax-exempt and taxable interest on your income tax return (lines 2a and 2b 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.
FAQs
Most interest income is taxable as ordinary income on your federal tax return, and is therefore subject to ordinary income tax rates. There are a few exceptions, however. Generally speaking, most interest is considered taxable at the time you receive it or can withdraw it.
Do you have to pay taxes on interest income? ›
The IRS treats interest earned on a savings account as earned income, meaning it can be taxed. So, if you received $125 in interest on a high-yield savings account in 2023, you're required to pay taxes on that interest when you file your federal tax return for the 2023 tax year.
What is fidelity interest income? ›
The Interest Income page and related detail pages provide a summary of interest earned on government and corporate debt obligations and short-term certificates of deposit, as well as interest earned from cash awaiting reinvestment in a Fidelity Brokerage account.
What if I have more than $1500 in taxable interest income? ›
Schedule B is an IRS tax form that must be completed if a taxpayer receives interest income and/or ordinary dividends over the course of the year of more than $1,500. The schedule must accompany a taxpayer's Form 1040. Taxpayers use information from Forms 1099-INT and 1099-DIV to complete Schedule B.
Do you have to pay taxes on Fidelity investments? ›
For any time during the year you bought or sold shares in a mutual fund, you must report the transaction on your tax return and pay tax on any gains and dividends.
What happens if you don't report interest income? ›
If you receive a Form 1099-INT and do not report the interest on your tax return, the IRS will likely send you a CP2000, Underreported Income notice. This IRS notice will propose additional tax, penalties and interest on your interest payments and any other unreported income.
How to pay taxes on interest income? ›
The Internal Revenue Service requires most payments of interest income to be reported on tax form 1099-INT by the person or entity that makes the payments. This is most commonly a bank, other financial institution or government agency.
How to avoid paying taxes on interest income? ›
Roth Individual Retirement Account (IRA) or Roth 401(k): Interest earned in a Roth account is not taxed until it is withdrawn. And, if you are older than age 59 ½, you will owe no income taxes at all on the interest. However, early withdrawals before age 59 ½ incur a 10% penalty in addition to any income tax due.
What is the 4% rule for Fidelity? ›
We did the math—looking at history and simulating many potential outcomes—and landed on this: For a high degree of confidence that you can cover a consistent amount of expenses in retirement (i.e., it should work 90% of the time), aim to withdraw no more than 4% to 5% of your savings in the first year of retirement, ...
Does cash in a Fidelity account earn interest? ›
Yes, the Fidelity Cash Management Account pays interest. It currently has a 2.72% APY, which is much higher than the national average interest checking rate of April 15, 2024, according to the FDIC).
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.
How much interest can I earn without reporting to the IRS? ›
You should receive a Form 1099-INT Interest Income from banks and financial institutions if you earned more than $10 in interest for the year.
How much does the IRS tax on interest income? ›
Interest income and ordinary dividends (qualified dividends are taxed at capital gains rates) are taxed at the same rate as your ordinary income tax. For example, if your federal income tax rate is 22%, your interest income or dividends will also be taxed at 22%.
Does Fidelity automatically deduct taxes? ›
Federal income tax will not be withheld from distributions from a Roth IRA unless you elect to have such tax withheld. You may elect not to have federal tax withheld (provided that you have supplied Fidelity with a U. S. address) or you may select the amount withheld by specifying a percentage between 10% and 99%.
Is Fidelity safe to keep money in? ›
Protecting your assets
With our Customer Protection Guarantee, we reimburse you for losses from unauthorized activity in your accounts. We also participate in asset protection programs such as FDIC and SIPC to help provide the best service possible.
Does Fidelity report to the IRS? ›
The IRS Form 1099-B is part of the non-exempt Fidelity Tax Reporting Statement and is also part of the information that we are required to report to the IRS.
Do you need to report interest income under $10? ›
Even if you did not receive a Form 1099-INT, or if you received $10 or less in interest for the tax year, you are still required to report any interest earned and credited to your account during the year. The payer's identification number and address are not needed.
How much tax do I pay on savings account interest? ›
Your income tax bracket determines how much you can expect to be taxed on savings account interest. For example, if you make $50,000 a year, your federal tax rate is 22%. If you earn $100 in interest on a savings account, you'll have to pay $22 in interest taxes for that year.
Do I have to pay taxes on my child savings account interest? ›
If your child's interest, dividends, and other unearned income total more than $2,500, it may be subject to a specific tax on the unearned income of certain children. See the Instructions for Form 8615, Tax for Certain Children Who Have Unearned Income for more information.
Do you have to pay taxes on a CD when it matures? ›
If you purchase a short-term CD that matures the same year it was purchased and earn $10 or more, you'll have to pay taxes on it for that year. If the term of such a CD spans over two calendar years, you'll pay taxes on the interest you earn on two consecutive tax returns.
