Words you may need to know (see Glossary)
This section discusses the tax treatment of different types of interest income.
In general, any interest that you receive or that is credited to your account and can be withdrawn is taxable income. (It does not have to be entered in your passbook.) Exceptions to this rule are discussed later. taxmap/pubs/p550-002.htm#en_us_publink10009852
Interest income is generally reported to you on Form 1099-INT, or a similar statement, by banks, savings and loans, and other payers of interest. This form shows you the interest you received during the year. Keep this form for your records. You do not have to attach it to your tax return.
Report on your tax return the total amount of interest income that you receive for the tax year. taxmap/pubs/p550-002.htm#en_us_publink10009853
Even if you do not receive Form 1099-INT, you must still report all of your taxable interest income. For example, you may receive distributive shares of interest from partnerships or S corporations. This interest is reported to you on Schedule K-1 (Form 1065) and Schedule K-1 (Form 1120S).taxmap/pubs/p550-002.htm#en_us_publink10009854
Generally, if someone receives interest as a nominee for you, that person will give you a Form 1099-INT showing the interest received on your behalf.
If you receive a Form 1099-INT that includes amounts belonging to another person, see the discussion on Nominee distributions
, later, under How To Report Interest Income.
If you receive a Form 1099-INT that shows an incorrect amount (or other incorrect information), you should ask the issuer for a corrected form. The new Form 1099-INT you receive will be marked "Corrected." taxmap/pubs/p550-002.htm#en_us_publink10009856
Reportable interest income may also be shown on Form 1099-OID, Original Issue Discount. For more information about amounts shown on this form, see Original Issue Discount (OID)
, later in this chapter.
Exempt-interest dividends you receive from a mutual fund or other regulated investment company are not included in your taxable income. (However, see Information-reporting requirement, next.) Exempt-interest dividends should be shown in box 8 of Form 1099-INT. taxmap/pubs/p550-002.htm#en_us_publink10009858
Although exempt-interest dividends are not taxable, you must show them on your tax return if you have to file. This is an information-reporting requirement and does not change the exempt-interest dividends into taxable income. See How To Report Interest Income
Exempt-interest dividends paid from specified private activity bonds may be subject to the alternative minimum tax. The exempt-interest dividends subject to the alternative minimum tax are shown in box 9 of Form 1099-INT. See Form 6251 and its instructions for more information about this tax. Private activity bonds
are discussed later under State or Local Government Obligations
Interest on insurance dividends that you leave on deposit with the Department of Veterans Affairs (VA) is not taxable. This includes interest paid on dividends on converted United States Government Life Insurance policies and on National Service Life Insurance policies. taxmap/pubs/p550-002.htm#en_us_publink10009861
Interest on a Roth IRA generally is not taxable. Interest on a traditional IRA is tax deferred. You generally do not include it in your income until you make withdrawals from the IRA. See Publication 590 for more information. taxmap/pubs/p550-002.htm#en_us_publink10009862
Taxable interest includes interest you receive from bank accounts, loans you make to others, and other sources. The following are some sources of taxable interest. taxmap/pubs/p550-002.htm#en_us_publink10009863
Certain distributions commonly called dividends are actually interest. You must report as interest so-called "dividends" on deposits or on share accounts in:
- Cooperative banks,
- Credit unions,
- Domestic building and loan associations,
- Domestic savings and loan associations,
- Federal savings and loan associations, and
- Mutual savings banks.
The "dividends" will be shown as interest income on Form 1099-INT.
Money market funds are offered by nonbank financial institutions such as mutual funds and stock brokerage houses, and pay dividends. Generally, amounts you receive from money market funds should be reported as dividends, not as interest. taxmap/pubs/p550-002.htm#en_us_publink10009865
If you open any of these accounts, interest may be paid at fixed intervals of 1 year or less during the term of the account. You generally must include this interest in your income when you actually receive it or are entitled to receive it without paying a substantial penalty. The same is true for accounts that mature in 1 year or less and pay interest in a single payment at maturity. If interest is deferred for more than 1 year, see Original Issue Discount (OID)
If you withdraw funds from a deferred interest account before maturity, you may have to pay a penalty. You must report the total amount of interest paid or credited to your account during the year, without subtracting the penalty. See Penalty on early withdrawal of savings
under How To Report Interest Income
, later, for more information on how to report the interest and deduct the penalty.
The interest you pay on money borrowed from a bank or savings institution to meet the minimum deposit required for a certificate of deposit from the institution and the interest you earn on the certificate are two separate items. You must report the total interest you earn on the certificate in your income. If you itemize deductions, you can deduct the interest you pay as investment interest, up to the amount of your net investment income. See Interest Expenses
in chapter 3.
You deposited $5,000 with a bank and borrowed $5,000 from the bank to make up the $10,000 minimum deposit required to buy a 6-month certificate of deposit. The certificate earned $575 at maturity in 2009, but you received only $265, which represented the $575 you earned minus $310 interest charged on your $5,000 loan. The bank gives you a Form 1099-INT for 2009 showing the $575 interest you earned. The bank also gives you a statement showing that you paid $310 interest for 2009. You must include the $575 in your income. If you itemize your deductions on Schedule A (Form 1040), you can deduct $310, subject to the net investment income limit.taxmap/pubs/p550-002.htm#en_us_publink10009869
If you receive noncash gifts or services for making deposits or for opening an account in a savings institution, you may have to report the value as interest.
For deposits of less than $5,000, gifts or services valued at more than $10 must be reported as interest. For deposits of $5,000 or more, gifts or services valued at more than $20 must be reported as interest. The value is determined by the cost to the financial institution. taxmap/pubs/p550-002.htm#en_us_publink10009870
You open a savings account at your local bank and deposit $800. The account earns $20 interest. You also receive a $15 calculator. If no other interest is credited to your account during the year, the Form 1099-INT you receive will show $35 interest for the year. You must report $35 interest income on your tax return. taxmap/pubs/p550-002.htm#en_us_publink10009871
Interest on insurance dividends left on deposit with an insurance company that can be withdrawn annually is taxable to you in the year it is credited to your account. However, if you can withdraw it only on the anniversary date of the policy (or other specified date), the interest is taxable in the year that date occurs. taxmap/pubs/p550-002.htm#en_us_publink10009872
Any increase in the value of prepaid insurance premiums, advance premiums, or premium deposit funds is interest if it is applied to the payment of premiums due on insurance policies or made available for you to withdraw. taxmap/pubs/p550-002.htm#en_us_publink10009873
Interest on U.S. obligations, such as U.S. Treasury bills, notes, and bonds, issued by any agency or instrumentality of the United States is taxable for federal income tax purposes. taxmap/pubs/p550-002.htm#en_us_publink10009874
Interest you receive on tax refunds is taxable income. taxmap/pubs/p550-002.htm#en_us_publink10009875
If the condemning authority pays you interest to compensate you for a delay in payment of an award, the interest is taxable. taxmap/pubs/p550-002.htm#en_us_publink10009876
If a contract for the sale or exchange of property provides for deferred payments, it also usually provides for interest payable with the deferred payments. That interest is taxable when you receive it. If little or no interest is provided for in a deferred payment contract, part of each payment may be treated as interest. See Unstated Interest and Original Issue Discount in Publication 537. taxmap/pubs/p550-002.htm#en_us_publink10009877
Accumulated interest on an annuity contract you sell before its maturity date is taxable. taxmap/pubs/p550-002.htm#en_us_publink10009878
Usurious interest is interest charged at an illegal rate. This is taxable as interest unless state law automatically changes it to a payment on the principal. taxmap/pubs/p550-002.htm#en_us_publink10009879
Exclude from your gross income interest on frozen deposits. A deposit is frozen if, at the end of the year, you cannot withdraw any part of the deposit because:
- The financial institution is bankrupt or insolvent, or
- The state in which the institution is located has placed limits on withdrawals because other financial institutions in the state are bankrupt or insolvent.
The amount of interest you must exclude is the interest that was credited on the frozen deposits minus the sum of:
- The net amount you withdrew from these deposits during the year, and
- The amount you could have withdrawn as of the end of the year (not reduced by any penalty for premature withdrawals of a time deposit).
If you receive a Form 1099-INT for interest income on deposits that were frozen at the end of 2009, see Frozen deposits
under How To Report Interest Income
for information about reporting this interest income exclusion on your tax return.
The interest you exclude is treated as credited to your account in the following year. You must include it in income in the year you can withdraw it.taxmap/pubs/p550-002.htm#en_us_publink10009880
$100 of interest was credited on your frozen deposit during the year. You withdrew $80 but could not withdraw any more as of the end of the year. You must include $80 in your income and exclude $20 from your income for the year. You must include the $20 in your income for the year you can withdraw it.taxmap/pubs/p550-002.htm#en_us_publink10009881
If you buy a bond at a discount when interest has been defaulted or when the interest has accrued but has not been paid, the transaction is described as trading a bond flat. The defaulted or unpaid interest is not income and is not taxable as interest if paid later. When you receive a payment of that interest, it is a return of capital that reduces the remaining cost basis of your bond. Interest that accrues after the date of purchase, however, is taxable interest income for the year received or accrued. See Bonds Sold Between Interest Dates
, later in this chapter.
If you make a below-market gift or demand loan, you must report as interest income any forgone interest (defined later) from that loan. The below-market loan rules and exceptions are described in this section. For more information, see section 7872 of the Internal Revenue Code and its regulations.
If you receive a below-market loan, you may be able to deduct the forgone interest as well as any interest that you actually paid, but not if it is personal interest.taxmap/pubs/p550-002.htm#en_us_publink10009883
The rules for below-market loans apply to:
- Gift loans,
- Pay-related loans,
- Corporation-shareholder loans,
- Tax avoidance loans, and
- Certain loans made to qualified continuing care facilities under a continuing care contract.
A pay-related loan is any below-market loan between an employer and an employee or between an independent contractor and a person for whom the contractor provides services.
A tax avoidance loan is any below-market loan where the avoidance of federal tax is one of the main purposes of the interest arrangement. taxmap/pubs/p550-002.htm#en_us_publink10009884
For any period, forgone interest is:
- The amount of interest that would be payable for that period if interest accrued on the loan at the applicable federal rate and was payable annually on December 31, minus
- Any interest actually payable on the loan for the period.
Applicable federal rates are published by the IRS each month in the Internal Revenue Bulletin. Some IRS offices have these bulletins available for research. See chapter 5
for other ways to get this information.
The rules that apply to a below-market loan depend on whether the loan is a gift loan, demand loan, or term loan.taxmap/pubs/p550-002.htm#en_us_publink10009887
A gift loan is any below-market loan where the forgone interest is in the nature of a gift.
A demand loan is a loan payable in full at any time upon demand by the lender. A demand loan is a below-market loan if no interest is charged or if interest is charged at a rate below the applicable federal rate.
A demand loan or gift loan that is a below-market loan is generally treated as an arm's-length transaction in which the lender is treated as having made:
- A loan to the borrower in exchange for a note that requires the payment of interest at the applicable federal rate, and
- An additional payment to the borrower in an amount equal to the forgone interest.
The borrower is generally treated as transferring the additional payment back to the lender as interest. The lender must report that amount as interest income.
The lender's additional payment to the borrower is treated as a gift, dividend, contribution to capital, pay for services, or other payment, depending on the substance of the transaction. The borrower may have to report this payment as taxable income, depending on its classification.
These transfers are considered to occur annually, generally on December 31.taxmap/pubs/p550-002.htm#en_us_publink10009888
A term loan is any loan that is not a demand loan. A term loan is a below-market loan if the amount of the loan is more than the present value of all payments due under the loan.
A lender who makes a below-market term loan other than a gift loan is treated as transferring an additional lump-sum cash payment to the borrower (as a dividend, contribution to capital, etc.) on the date the loan is made. The amount of this payment is the amount of the loan minus the present value, at the applicable federal rate, of all payments due under the loan. An equal amount is treated as original issue discount (OID). The lender must report the annual part of the OID as interest income. The borrower may be able to deduct the OID as interest expense. See Original Issue Discount (OID)
Exceptions to the below-market loan rules are discussed here.taxmap/pubs/p550-002.htm#en_us_publink10009890
The rules for below-market loans do not apply to any day on which the total outstanding amount of loans between the borrower and lender is $10,000 or less. This exception applies only to:
- Gift loans between individuals if the gift loan is not directly used to buy or carry income-producing assets, and
- Pay-related loans or corporation-shareholder loans if the avoidance of federal tax is not a principal purpose of the interest arrangement.
This exception does not apply to a term loan described in (2) above that previously has been subject to the below-market loan rules. Those rules will continue to apply even if the outstanding balance is reduced to $10,000 or less. taxmap/pubs/p550-002.htm#en_us_publink10009891
Loans to qualified continuing care facilities under continuing care contracts are not subject to the rules for below-market loans for the calendar year if the lender or the lender's spouse is age 62 or older at the end of the year. For the definitions of qualified continuing care facility and continuing care contract, see Internal Revenue Code section 7872(h). taxmap/pubs/p550-002.htm#en_us_publink10009892
Loans are excluded from the below-market loan rules if their interest arrangements do not have a significant effect on the federal tax liability of the borrower or the lender. These loans include:
- Loans made available by the lender to the general public on the same terms and conditions that are consistent with the lender's customary business practice,
- Loans subsidized by a federal, state, or municipal government that are made available under a program of general application to the public,
- Certain employee-relocation loans,
- Certain loans from a foreign person, unless the interest income would be effectively connected with the conduct of a U.S. trade or business and would not be exempt from U.S. tax under an income tax treaty,
- Gift loans to a charitable organization, contributions to which are deductible, if the total outstanding amount of loans between the organization and lender is $250,000 or less at all times during the tax year, and
- Other loans on which the interest arrangement can be shown to have no significant effect on the federal tax liability of the lender or the borrower.
For a loan described in (6) above, all the facts and circumstances are used to determine if the interest arrangement has a significant effect on the federal tax liability of the lender or borrower. Some factors to be considered are:
- Whether items of income and deduction generated by the loan offset each other,
- The amount of these items,
- The cost to you of complying with the below-market loan rules, if they were to apply, and
- Any reasons other than taxes for structuring the transaction as a below-market loan.
If you structure a transaction to meet this exception, and one of the principal purposes of structuring the transaction in that way is the avoidance of federal tax, the loan will be considered a tax-avoidance loan and this exception will not apply. taxmap/pubs/p550-002.htm#en_us_publink10009893
For gift loans between individuals, if the outstanding loans between the lender and borrower total $100,000 or less, the forgone interest to be included in income by the lender and deducted by the borrower is limited to the amount of the borrower's net investment income for the year. If the borrower's net investment income is $1,000 or less, it is treated as zero. This limit does not apply to a loan if the avoidance of federal tax is one of the main purposes of the interest arrangement. taxmap/pubs/p550-002.htm#en_us_publink10009894
These rules apply to term loans made after June 6, 1984, and to demand loans outstanding after that date. taxmap/pubs/p550-002.htm#en_us_publink10009895
This section provides tax information on U.S. savings bonds. It explains how to report the interest income on these bonds and how to treat transfers of these bonds.
U.S. savings bonds currently offered to individuals are the following.
- Series EE bonds
- Series I bonds
For other information on U.S. savings bonds, write to:
For Series HH/H:
Bureau of the Public Debt
Division of Customer Assistance
P.O. Box 2186
Parkersburg, WV 26106-2186.
For Series EE and I:
Bureau of the Public Debt
Division of Customer Assistance
P.O. Box 7012
Parkersburg, WV 26106-7012.
If you use an accrual method of accounting, you must report interest on U.S. savings bonds each year as it accrues. You cannot postpone reporting interest until you receive it or until the bonds mature. taxmap/pubs/p550-002.htm#en_us_publink10009899taxmap/pubs/p550-002.htm#en_us_publink10009900
These bonds were issued at face value. Interest is paid twice a year by direct deposit to your bank account. If you are a cash method taxpayer, you must report interest on these bonds as income in the year you receive it.
Series HH bonds were first offered in 1980; they were last offered in August 2004. Before 1980, series H bonds were issued. Series H bonds are treated the same as series HH bonds. If you are a cash method taxpayer, you must report the interest when you receive it.
Series H bonds have a maturity period of 30 years. Series HH bonds mature in 20 years. taxmap/pubs/p550-002.htm#en_us_publink10009901
Interest on these bonds is payable when you redeem the bonds. The difference between the purchase price and the redemption value is taxable interest.taxmap/pubs/p550-002.htm#en_us_publink1000222047
Series EE bonds were first offered in January 1980. They have a maturity period of 30 years. Before July 1980, series E bonds were issued. The original 10-year maturity period of series E bonds has been extended to 40 years for bonds issued before December 1965 and 30 years for bonds issued after November 1965. Paper series EE and series E bonds are issued at a discount. The face value is payable to you at maturity. Electronic series EE bonds are issued at their face value. The face value plus accrued interest is payable to you at maturity.
Owners of paper series E and EE bonds can convert them to electronic bonds. These converted bonds do not retain the denomination listed on the paper certificate but are posted at their purchase price (with accrued interest).taxmap/pubs/p550-002.htm#en_us_publink1000222048
Series I bonds were first offered in 1998. These are inflation-indexed bonds issued at their face amount with a maturity period of 30 years. The face value plus all accrued interest is payable to you at maturity. taxmap/pubs/p550-002.htm#en_us_publink10009904
If you use the cash method of reporting income, you can report the interest on series EE, series E, and series I bonds in either of the following ways.
- Method 1. Postpone reporting the interest until the earlier of the year you cash or dispose of the bonds or the year in which they mature. (However, see Savings bonds traded, later.)
Note. Series E bonds issued in 1979 matured in 2009. If you have used method 1, you generally must report the interest on these bonds on your 2009 return.
- Method 2. Choose to report the increase in redemption value as interest each year.
You must use the same method for all series EE, series E, and series I bonds you own. If you do not choose method 2 by reporting the increase in redemption value as interest each year, you must use method 1.
If you plan to cash your bonds in the same year that you will pay for higher educational expenses, you may want to use method 1 because you may be able to exclude the interest from your income. To learn how, see Education Savings Bond Program
If you want to change your method of reporting the interest from method 1 to method 2, you can do so without permission from the IRS. In the year of change, you must report all interest accrued to date and not previously reported for all your bonds.
Once you choose to report the interest each year, you must continue to do so for all series EE, series E, and series I bonds you own and for any you get later, unless you request permission to change, as explained next. taxmap/pubs/p550-002.htm#en_us_publink10009907
To change from method 2 to method 1, you must request permission from the IRS. Permission for the change is automatically granted if you send the IRS a statement that meets all the following requirements.
- You have typed or printed the following number at the top: "131."
- It includes your name and social security number under "131."
- It includes the year of change (both the beginning and ending dates).
- It identifies the savings bonds for which you are requesting this change.
- It includes your agreement to:
- Report all interest on any bonds acquired during or after the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest, and
- Report all interest on the bonds acquired before the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest, with the exception of the interest reported in prior tax years.
You must attach this statement to your tax return for the year of change, which you must file by the due date (including extensions).
You can have an automatic extension of 6 months from the due date of your return for the year of change (excluding extensions) to file the statement with an amended return. On the statement, type or print "Filed pursuant to section 301.9100-2." To get this extension, you must have filed your original return for the year of the change by the due date (including extensions).
By the date you file the original statement with your return, you must also send a signed copy to the address below.
Internal Revenue Service
Attention: CC:IT&A (Automatic Rulings Branch)
P.O. Box 7604
Benjamin Franklin Station
Washington, DC 20044
If you use a private delivery service, send the signed copy to the address below.
Internal Revenue Service
(Automatic Rulings Branch) Room 5336
1111 Constitution Avenue, NW
Washington, DC 20224
Instead of filing this statement, you can request permission to change from method 2 to method 1 by filing Form 3115. In that case, follow the form instructions for an automatic change. No user fee is required. taxmap/pubs/p550-002.htm#en_us_publink10009909
If a U.S. savings bond is issued in the names of co-owners, such as you and your child or you and your spouse, interest on the bond is generally taxable to the co-owner who bought the bond.taxmap/pubs/p550-002.htm#en_us_publink10009910
If you used your funds to buy the bond, you must pay the tax on the interest. This is true even if you let the other co-owner redeem the bond and keep all the proceeds. Under these circumstances, the co-owner who redeemed the bond will receive a Form 1099-INT at the time of redemption and must provide you with another Form 1099-INT showing the amount of interest from the bond that is taxable to you. The co-owner who redeemed the bond is a "nominee." See Nominee distributions
under How To Report Interest Income
, later, for more information about how a person who is a nominee reports interest income belonging to another person.
If you and the other co-owner each contribute part of the bond's purchase price, the interest is generally taxable to each of you, in proportion to the amount each of you paid. taxmap/pubs/p550-002.htm#en_us_publink10009912
If you and your spouse live in a community property state and hold bonds as community property, one-half of the interest is considered received by each of you. If you file separate returns, each of you generally must report one-half of the bond interest. For more information about community property, see Publication 555, Community Property. taxmap/pubs/p550-002.htm#en_us_publink10009913
These rules are also shown in Table 1-2.taxmap/pubs/p550-002.htm#en_us_publink10009914
Interest on U.S. savings bonds bought for and registered only in the name of your child is income to your child, even if you paid for the bonds and are named as beneficiary. If the bonds are series EE, series E, or series I bonds, the interest on the bonds is income to your child in the earlier of the year the bonds are cashed or disposed of or the year the bonds mature, unless your child chooses to report the interest income each year. taxmap/pubs/p550-002.htm#en_us_publink10009915
The choice to report the accrued interest each year can be made either by your child or by you for your child. This choice is made by filing an income tax return that shows all the interest earned to date, and by stating on the return that your child chooses to report the interest each year. Either you or your child should keep a copy of this return.
Unless your child is otherwise required to file a tax return for any year after making this choice, your child does not have to file a return only to report the annual accrual of U.S. savings bond interest under this choice. However, see Tax on investment income of certain children
, earlier, under General Information
. Neither you nor your child can change the way you report the interest unless you request permission from the IRS, as discussed earlier under Change from method 2
If you bought series E, series EE, or series I bonds entirely with your own funds and had them reissued in your co-owner's name or beneficiary's name alone, you must include in your gross income for the year of reissue all interest that you earned on these bonds and have not previously reported. But, if the bonds were reissued in your name alone, you do not have to report the interest accrued at that time.
This same rule applies when bonds (other than bonds held as community property) are transferred between spouses or incident to divorce. taxmap/pubs/p550-002.htm#en_us_publink10009917
You bought series EE bonds entirely with your own funds. You did not choose to report the accrued interest each year. Later, you transfer the bonds to your former spouse under a divorce agreement. You must include the deferred accrued interest, from the date of the original issue of the bonds to the date of transfer, in your income in the year of transfer. Your former spouse includes in income the interest on the bonds from the date of transfer to the date of redemption.
Table 1-2. Who Pays the Tax on U.S. Savings Bond Interest
| IF ... || THEN the interest must be reported by ... |
|you buy a bond in your name and the name of another person as co-owners, using only your own funds||you.|
|you buy a bond in the name of another person, who is the sole owner of the bond||the person for whom you bought the bond.|
|you and another person buy a bond as co-owners, each contributing part of the purchase price||both you and the other co-owner, in proportion to the amount each paid for the bond.|
|you and your spouse, who live in a community property state, buy a bond that is community property||you and your spouse. If you file separate returns, both you and your spouse generally report one-half of the interest.|
If you and a co-owner each contributed funds to buy series E, series EE, or series I bonds jointly and later have the bonds reissued in the co-owner's name alone, you must include in your gross income for the year of reissue your share of all the interest earned on the bonds that you have not previously reported. The former co-owner does not have to include in gross income at the time of reissue his or her share of the interest earned that was not reported before the transfer. This interest, however, as well as all interest earned after the reissue, is income to the former co-owner.
This income-reporting rule also applies when the bonds are reissued in the name of your former co-owner and a new co-owner. But the new co-owner will report only his or her share of the interest earned after the transfer.
If bonds that you and a co-owner bought jointly are reissued to each of you separately in the same proportion as your contribution to the purchase price, neither you nor your co-owner has to report at that time the interest earned before the bonds were reissued.taxmap/pubs/p550-002.htm#en_us_publink10009919
You and your spouse each spent an equal amount to buy a $1,000 series EE savings bond. The bond was issued to you and your spouse as co-owners. You both postpone reporting interest on the bond. You later have the bond reissued as two $500 bonds, one in your name and one in your spouse's name. At that time neither you nor your spouse has to report the interest earned to the date of reissue.taxmap/pubs/p550-002.htm#en_us_publink10009920
You bought a $1,000 series EE savings bond entirely with your own funds. The bond was issued to you and your spouse as co-owners. You both postponed reporting interest on the bond. You later have the bond reissued as two $500 bonds, one in your name and one in your spouse's name. You must report half the interest earned to the date of reissue. taxmap/pubs/p550-002.htm#en_us_publink10009921
If you own series E, series EE, or series I bonds and transfer them to a trust, giving up all rights of ownership, you must include in your income for that year the interest earned to the date of transfer if you have not already reported it. However, if you are considered the owner of the trust and if the increase in value both before and after the transfer continues to be taxable to you, you can continue to defer reporting the interest earned each year. You must include the total interest in your income in the year you cash or dispose of the bonds or the year the bonds finally mature, whichever is earlier.
The same rules apply to previously unreported interest on series EE or series E bonds if the transfer to a trust consisted of series HH or series H bonds you acquired in a trade for the series EE or series E bonds. See Savings bonds traded
The manner of reporting interest income on series E, series EE, or series I bonds, after the death of the owner, depends on the accounting and income-reporting methods previously used by the decedent.taxmap/pubs/p550-002.htm#en_us_publink10009923
If the bonds transferred because of death were owned by a person who used an accrual method, or who used the cash method and had chosen to report the interest each year, the interest earned in the year of death up to the date of death must be reported on that person's final return. The person who acquires the bonds includes in income only interest earned after the date of death. taxmap/pubs/p550-002.htm#en_us_publink10009924
If the transferred bonds were owned by a decedent who had used the cash method and had not chosen to report the interest each year, and who had bought the bonds entirely with his or her own funds, all interest earned before death must be reported in one of the following ways.
- The surviving spouse or personal representative (executor, administrator, etc.) who files the final income tax return of the decedent can choose to include on that return all of the interest earned on the bonds before the decedent's death. The person who acquires the bonds then includes in income only interest earned after the date of death.
- If the choice in (1) is not made, the interest earned up to the date of death is income in respect of the decedent. It should not be included in the decedent's final return. All of the interest earned both before and after the decedent's death (except any part reported by the estate on its income tax return) is income to the person who acquires the bonds. If that person uses the cash method and does not choose to report the interest each year, he or she can postpone reporting it until the year the bonds are cashed or disposed of or the year they mature, whichever is earlier. In the year that person reports the interest, he or she can claim a deduction for any federal estate tax that was paid on the part of the interest included in the decedent's estate.
For more information on income in respect of a decedent, see Publication 559, Survivors, Executors, and Administrators.
Your uncle, a cash method taxpayer, died and left you a $1,000 series EE bond. He had bought the bond for $500 and had not chosen to report the interest each year. At the date of death, interest of $200 had accrued on the bond and its value of $700 was included in your uncle's estate. Your uncle's executor chose not to include the $200 accrued interest in your uncle's final income tax return. The $200 is income in respect of the decedent.
You are a cash method taxpayer and do not choose to report the interest each year as it is earned. If you cash the bond when it reaches maturity value of $1,000, you report $500 interest income—the difference between maturity value of $1,000 and the original cost of $500. For that year, you can deduct (as a miscellaneous itemized deduction not subject to the 2%-of-adjusted-gross-income limit) any federal estate tax paid because the $200 interest was included in your uncle's estate. taxmap/pubs/p550-002.htm#en_us_publink10009926
If, in Example 1, the executor had chosen to include the $200 accrued interest in your uncle's final return, you would report only $300 as interest when you cashed the bond at maturity. $300 is the interest earned after your uncle's death.taxmap/pubs/p550-002.htm#en_us_publink10009927
If, in Example 1, you make or have made the choice to report the increase in redemption value as interest each year, you include in gross income for the year you acquire the bond all of the unreported increase in value of all series E, series EE, and series I bonds you hold, including the $200 on the bond you inherited from your uncle.taxmap/pubs/p550-002.htm#en_us_publink10009928
When your aunt died, she owned series H bonds that she had acquired in a trade for series E bonds. You were the beneficiary of these bonds. Your aunt used the cash method and did not choose to report the interest on the series E bonds each year as it accrued. Your aunt's executor chose not to include any interest earned before your aunt's death on her final return.
The income in respect of the decedent is the sum of the unreported interest on the series E bonds and the interest, if any, payable on the series H bonds but not received as of the date of your aunt's death. You must report any interest received during the year as income on your return. The part of the interest that was payable but not received before your aunt's death is income in respect of the decedent and may qualify for the estate tax deduction. For information on when to report the interest on the series E bonds traded, see Savings bonds traded, later.taxmap/pubs/p550-002.htm#en_us_publink10009929
If you acquire a U.S. savings bond in a taxable distribution from a retirement or profit-sharing plan, your income for the year of distribution includes the bond's redemption value (its cost plus the interest accrued before the distribution). When you redeem the bond (whether in the year of distribution or later), your interest income includes only the interest accrued after the bond was distributed. To figure the interest reported as a taxable distribution and your interest income when you redeem the bond, see Worksheet for savings bonds distributed from a retirement or profit-sharing plan
under How To Report Interest Income
If you postponed reporting the interest on your series EE or series E bonds, you did not recognize taxable income when you traded the bonds for series HH or series H bonds, unless you received cash in the trade. (You cannot trade series I bonds for series HH bonds. After August 31, 2004, you cannot trade any other series of bonds for series HH bonds.) Any cash you received is income up to the amount of the interest earned on the bonds traded. When your series HH or series H bonds mature, or if you dispose of them before maturity, you report as interest the difference between their redemption value and your cost. Your cost is the sum of the amount you paid for the traded series EE or series E bonds plus any amount you had to pay at the time of the trade. taxmap/pubs/p550-002.htm#en_us_publink10009931
In 2004, you traded series EE bonds (on which you postponed reporting the interest) for $2,500 in series HH bonds and $223 in cash. You reported the $223 as taxable income in 2004, the year of the trade. At the time of the trade, the series EE bonds had accrued interest of $523 and a redemption value of $2,723. You hold the series HH bonds until maturity, when you receive $2,500. You must report $300 as interest income in the year of maturity. This is the difference between their redemption value, $2,500, and your cost, $2,200 (the amount you paid for the series EE bonds). (It is also the difference between the accrued interest of $523 on the series EE bonds and the $223 cash received on the trade.) taxmap/pubs/p550-002.htm#en_us_publink10009932
You could have chosen to treat all of the previously unreported accrued interest on series EE or series E bonds traded for series HH bonds as income in the year of the trade. If you made this choice, it is treated as a change from method 1. See Change from method 1
under Series EE and series I bonds
When you cash a bond, the bank or other payer that redeems it must give you a Form 1099-INT if the interest part of the payment you receive is $10 or more. Box 3 of your Form 1099-INT should show the interest as the difference between the amount you received and the amount paid for the bond. However, your Form 1099-INT may show more interest than you have to include on your income tax return. For example, this may happen if any of the following are true.
- You chose to report the increase in the redemption value of the bond each year. The interest shown on your Form 1099-INT will not be reduced by amounts previously included in income.
- You received the bond from a decedent. The interest shown on your Form 1099-INT will not be reduced by any interest reported by the decedent before death, or on the decedent's final return, or by the estate on the estate's income tax return.
- Ownership of the bond was transferred. The interest shown on your Form 1099-INT will not be reduced by interest that accrued before the transfer.
- You were named as a co-owner and the other co-owner contributed funds to buy the bond. The interest shown on your Form 1099-INT will not be reduced by the amount you received as nominee for the other co-owner. (See Co-owners, earlier in this section, for more information about the reporting requirements.)
- You received the bond in a taxable distribution from a retirement or profit-sharing plan. The interest shown on your Form 1099-INT will not be reduced by the interest portion of the amount taxable as a distribution from the plan and not taxable as interest. (This amount is generally shown on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc., for the year of distribution.)
Interest on U.S. savings bonds is exempt from state and local taxes. The Form 1099-INT you receive will indicate the amount that is for U.S. savings bonds interest in box 3. Do not include this income on your state or local income tax return.
You may be able to exclude from income all or part of the interest you receive on the redemption of qualified U.S. savings bonds during the year if you pay qualified higher educational expenses during the same year. This exclusion is known as the Education Savings Bond Program.
You do not qualify for this exclusion if your filing status is married filing separately. taxmap/pubs/p550-002.htm#en_us_publink10009936
Use Form 8815, Exclusion of Interest From Series EE and I U.S. Savings Bonds Issued After 1989, to figure your exclusion. Attach the form to your Form 1040 or Form 1040A.taxmap/pubs/p550-002.htm#en_us_publink10009937
A qualified U.S. savings bond is a series EE bond issued after 1989 or a series I bond. The bond must be issued either in your name (sole owner) or in your and your spouse's names (co-owners). You must be at least 24 years old before the bond's issue date. For example, a bond bought by a parent and issued in the name of his or her child under age 24 does not qualify for the exclusion by the parent or child.
The issue date of a bond may be earlier than the date the bond is purchased because the issue date assigned to a bond is the first day of the month in which it is purchased.
You can designate any individual (including a child) as a beneficiary of the bond. taxmap/pubs/p550-002.htm#en_us_publink10009940
If you claim the exclusion, the IRS will check it by using bond redemption information from the Department of Treasury. taxmap/pubs/p550-002.htm#en_us_publink10009941
Qualified higher educational expenses are tuition and fees required for you, your spouse, or your dependent (for whom you claim an exemption) to attend an eligible educational institution.
Qualified expenses include any contribution you make to a qualified tuition program or to a Coverdell education savings account. For information about these programs, see Publication 970, Tax Benefits for Education.
Qualified expenses do not include expenses for room and board or for courses involving sports, games, or hobbies that are not part of a degree or certificate granting program. taxmap/pubs/p550-002.htm#en_us_publink10009942
These institutions include most public, private, and nonprofit universities, colleges, and vocational schools that are accredited and are eligible to participate in student aid programs run by the Department of Education. See chapter 11 of Publication 970 for information on foreign schools that are eligible.taxmap/pubs/p550-002.htm#en_us_publink10009943
You must reduce your qualified higher educational expenses by all of the following tax-free benefits.
- Tax-free part of scholarships and fellowships.
- Expenses used to figure the tax-free portion of distributions from a Coverdell ESA.
- Expenses used to figure the tax-free portion of distributions from a qualified tuition program.
- Any tax-free payments (other than gifts or inheritances) received as educational assistance, such as:
- Veterans' educational assistance benefits,
- Qualified tuition reductions, or
- Employer-provided educational assistance.
- Any expense used in figuring the American Opportunity, Hope, and lifetime learning credits.
For information about these benefits, see Publication 970.
If the total proceeds (interest and principal) from the qualified U.S. savings bonds you redeem during the year are not more than your adjusted qualified higher educational expenses for the year, you may be able to exclude all of the interest. If the proceeds are more than the expenses, you may be able to exclude only part of the interest.
To determine the excludable amount, multiply the interest part of the proceeds by a fraction. The numerator (top part) of the fraction is the qualified higher educational expenses you paid during the year. The denominator (bottom part) of the fraction is the total proceeds you received during the year. taxmap/pubs/p550-002.htm#en_us_publink10009945
In February 2009, Mark and Joan, a married couple, cashed a qualified series EE U.S. savings bond they bought in April 1996. They received proceeds of $8,124, representing principal of $5,000 and interest of $3,124. In 2009, they paid $4,000 of their daughter's college tuition. They are not claiming an education credit for that amount, and their daughter does not have any tax-free educational assistance. They can exclude $1,538 ($3,124 × ($4,000 ÷ $8,124)) of interest in 2009. They must pay tax on the remaining $1,586 ($3,124 − $1,538) interest.taxmap/pubs/p550-002.htm#en_us_publink10009946
To figure the amount of interest to report on Form 8815, line 6, use the Line 6 Worksheet in the Form 8815 instructions.
If you previously reported any interest from savings bonds cashed during 2009, use the Alternate Line 6 Worksheet below instead.
| Alternate Line 6 Worksheet |
|1.||Enter the amount from Form 8815, line 5|| |
|2.||Enter the face value of all post-1989 paper series EE bonds cashed in 2009|| |
|3.||Multiply line 2 above by 50% (.50)|| |
|4.||Enter the face value of all electronic series EE bonds (including post-1989 series EE bonds converted from paper to electronic format) and all series I bonds cashed in 2009|| |
|5.||Add lines 3 and 4|| |
|6.||Subtract line 5 from line 1|| |
|7.||Enter the amount of interest reported as income in previous years|| |
|8.||Subtract line 7 from line 6. Enter the result here and on Form 8815, line 6|| |taxmap/pubs/p550-002.htm#en_us_publink10009949
The interest exclusion is limited if your modified adjusted gross income (modified AGI) is:
- $69,950 to $84,950 for taxpayers filing single or head of household, and
- $104,900 to $134,900 for married taxpayers filing jointly, or for a qualifying widow(er) with dependent child.
You do not qualify for the interest exclusion if your modified AGI is equal to or more than the upper limit for your filing status.
Modified AGI, for purposes of this exclusion, is adjusted gross income (Form 1040A, line 21, or Form 1040, line 37) figured before the interest exclusion, and modified by adding back any:
- Foreign earned income exclusion,
- Foreign housing exclusion and deduction,
- Exclusion of income for bona fide residents of American Samoa,
- Exclusion for income from Puerto Rico,
- Exclusion for adoption benefits received under an employer's adoption assistance program,
- Deduction for tuition and fees,
- Deduction for student loan interest, and
- Deduction for domestic production activities.
Use the worksheet in the instructions for line 9, Form 8815, to figure your modified AGI. If you claim any of the exclusion or deduction items listed above (except items 6, 7, and 8), add the amount of the exclusion or deduction (except any deduction for tuition and fees, student loan interest or domestic production activities) to the amount on line 5 of the worksheet, and enter the total on Form 8815, line 9, as your modified AGI. taxmap/pubs/p550-002.htm#en_us_publink10009950
Because the deduction for interest expenses due to royalties and other investments is limited to your net investment income (see Investment Interest
in chapter 3), you cannot figure the deduction for interest expenses until you have figured this exclusion of savings bond interest. Therefore, if you had interest expenses that are due to royalties and deductible on Schedule E (Form 1040), you must make a special computation of your deductible interest to figure the net royalty income included in your modified AGI. You must figure deductible interest without regard to this exclusion of bond interest.
You can use a "dummy" Form 4952, Investment Interest Expense Deduction, to make the special computation. On this form, include in your net investment income your total interest income for the year from series EE and I U.S. savings bonds. Use the deductible interest amount from this form only to figure the net royalty income included in your modified AGI. Do not attach this form to your tax return.
After you figure this interest exclusion, use a separate Form 4952 to figure your actual deduction for investment interest expenses, and attach that form to your return.
Recordkeeping. If you claim the interest exclusion, you must keep a written record of the qualified U.S. savings bonds you redeem. Your record must include the serial number, issue date, face value, and total redemption proceeds (principal and interest) of each bond. You can use Form 8818, Optional Form To Record Redemption of Series EE and I U.S. Savings Bonds Issued After 1989, to record this information. You should also keep bills, receipts, canceled checks, or other documentation that shows you paid qualified higher educational expenses during the year.
Treasury bills, notes, and bonds are direct debts (obligations) of the U.S. Government. taxmap/pubs/p550-002.htm#en_us_publink10009953
Interest income from Treasury bills, notes, and bonds is subject to federal income tax, but is exempt from all state and local income taxes. You should receive Form 1099-INT showing the amount of interest (in box 3) that was paid to you for the year.
Payments of principal and interest generally will be credited to your designated checking or savings account by direct deposit through the TreasuryDirect® system.taxmap/pubs/p550-002.htm#en_us_publink10009954
These bills generally have a 4-week, 13-week, 26-week, or 52-week maturity period. They are issued at a discount in the amount of $100 and multiples of $100. The difference between the discounted price you pay for the bills and the face value you receive at maturity is interest income. Generally, you report this interest income when the bill is paid at maturity. See Discount on Short-Term Obligations
under Discount on Debt Instruments
If you reinvest your Treasury bill at its maturity in a new Treasury bill, note, or bond, you will receive payment for the difference between the proceeds of the maturing bill (par amount less any tax withheld) and the purchase price of the new Treasury security. However, you must report the full amount of the interest income on each of your Treasury bills at the time it reaches maturity. taxmap/pubs/p550-002.htm#en_us_publink10009955
Treasury notes have maturity periods of more than 1 year, ranging up to 10 years. Maturity periods for Treasury bonds are longer than 10 years. Both of these Treasury issues generally are issued in denominations of $100 to $1 million. Both notes and bonds generally pay interest every 6 months. Generally, you report this interest for the year paid. When the notes or bonds mature, you can redeem these securities for face value.
Treasury notes and bonds are sold by auction. Two types of bids are accepted: competitive bids and noncompetitive bids. If you make a competitive bid and a determination is made that the purchase price is less than the face value, you will receive a refund for the difference between the purchase price and the face value. This amount is considered original issue discount. However, the original issue discount rules (discussed later) do not apply if the discount is less than one-fourth of 1% (.0025) of the face amount, multiplied by the number of full years from the date of original issue to maturity. See De minimis OID
under Original Issue Discount (OID)
, later. If the purchase price is determined to be more than the face amount, the difference is a premium. (See Bond Premium Amortization
in chapter 3.)
For other information on these notes or bonds, write to:
Bureau of The Public Debt
P.O. Box 7015
Parkersburg, WV 26106-7015
These securities pay interest twice a year at a fixed rate, based on a principal amount that is adjusted to take into account inflation and deflation. For the tax treatment of these securities, see Inflation-Indexed Debt Instruments
under Original Issue Discount (OID)
For information on the retirement, sale, or redemption of U.S. government obligations, see Capital or Ordinary Gain or Loss
in chapter 4. Also see Nontaxable Trades
in chapter 4 for information about trading U.S. Treasury obligations for certain other designated issues.
If you sell a bond between interest payment dates, part of the sales price represents interest accrued to the date of sale. You must report that part of the sales price as interest income for the year of sale.
If you buy a bond between interest payment dates, part of the purchase price represents interest accrued before the date of purchase. When that interest is paid to you, treat it as a return of your capital investment, rather than interest income, by reducing your basis in the bond. See Accrued interest on bonds
under How To Report Interest Income
, later in this chapter, for information on reporting the payment.
Life insurance proceeds paid to you as beneficiary of the insured person are usually not taxable. But if you receive the proceeds in installments, you must usually report part of each installment payment as interest income.
For more information about insurance proceeds received in installments, see Publication 525.taxmap/pubs/p550-002.htm#en_us_publink10009962
If you leave life insurance proceeds on deposit with an insurance company under an agreement to pay interest only, the interest paid to you is taxable. taxmap/pubs/p550-002.htm#en_us_publink10009963
If you buy an annuity with life insurance proceeds, the annuity payments you receive are taxed as pension and annuity income from a nonqualified plan, not as interest income. See Publication 939, General Rule for Pensions and Annuities, for information on taxation of pension and annuity income from nonqualified plans. taxmap/pubs/p550-002.htm#en_us_publink10009964
Interest you receive on an obligation issued by a state or local government is generally not taxable. The issuer should be able to tell you whether the interest is taxable. The issuer should also give you a periodic (or year-end) statement showing the tax treatment of the obligation. If you invested in the obligation through a trust, a fund, or other organization, that organization should give you this information.
Even if interest on the obligation is not subject to income tax, you may have to report capital gain or loss when you sell it. Estate, gift, or generation-skipping tax may apply to other dispositions of the obligation.
Interest on a bond used to finance government operations generally is not taxable if the bond is issued by a state, the District of Columbia, a U.S. possession, or any of their political subdivisions. Political subdivisions include:
- Port authorities,
- Toll road commissions,
- Utility services authorities,
- Community redevelopment agencies, and
- Qualified volunteer fire departments (for certain obligations issued after 1980).
There are other requirements for tax-exempt bonds. Contact the issuing state or local government agency or see sections 103 and 141 through 150 of the Internal Revenue Code and the related regulations.
Obligations that are not bonds. Interest on a state or local government obligation may be tax exempt even if the obligation is not a bond. For example, interest on a debt evidenced only by an ordinary written agreement of purchase and sale may be tax exempt. Also, interest paid by an insurer on default by the state or political subdivision may be tax exempt.
A bond issued after June 30, 1983, generally must be in registered form for the interest to be tax exempt. taxmap/pubs/p550-002.htm#en_us_publink10009969
Bonds issued after 1982 by an Indian tribal government (including tribal economic development bonds issued after February 17, 2009) are treated as issued by a state. Interest on these bonds is generally tax exempt if the bonds are part of an issue of which substantially all of the proceeds are to be used in the exercise of any essential government function. However, the essential government function requirement does not apply to tribal economic development bonds issued after February 17, 2009, for tax-exempt treatment. Interest on private activity bonds (other than certain bonds for tribal manufacturing facilities) is taxable. taxmap/pubs/p550-002.htm#en_us_publink10009970
Original issue discount (OID) on tax-exempt state or local government bonds is treated as tax-exempt interest. taxmap/pubs/p550-002.htm#en_us_publink10009971
For special rules that apply to stripped tax-exempt obligations, see Stripped Bonds and Coupons
under Original Issue Discount (OID)
If you must file a tax return, you are required to show any tax-exempt interest you received on your return. This is an information-reporting requirement only. It does not change tax-exempt interest to taxable interest. See Reporting tax-exempt interest
under How To Report Interest Income
, later in this chapter.
Interest on some state or local obligations is taxable.taxmap/pubs/p550-002.htm#en_us_publink10009974
Interest on federally guaranteed state or local obligations issued after 1983 is generally taxable. This rule does not apply to interest on obligations guaranteed by the following U.S. Government agencies.
- Bonneville Power Authority (if the guarantee was under the Northwest Power Act as in effect on July 18, 1984).
- Department of Veterans Affairs.
- Federal home loan banks. (The guarantee must be made after July 30, 2008, in connection with the original bond issue during the period beginning on July 30, 2008, and ending on December 31, 2010 (or a renewal or extension of a guarantee so made) and the bank must meet safety and soundness requirements.)
- Federal Home Loan Mortgage Corporation.
- Federal Housing Administration.
- Federal National Mortgage Association.
- Government National Mortgage Corporation.
- Resolution Funding Corporation.
- Student Loan Marketing Association.
Tax credit bonds are bonds that generally do not pay interest. Instead, the bondholder is allowed an annual tax credit. The credit compensates the holder for lending money to the issuer and functions as interest paid on the bond. Use Form 8912, Credit to Holders of Tax Credit Bonds, to claim the credit for the following tax credit bonds and to figure the amount of the credit to report as interest income.
- Clean renewable energy bond.
- Gulf tax credit bond.
- Midwestern tax credit bond.
- Qualified forestry conservation bond.
- New clean renewable energy bond.
- Qualified energy conservation bond.
- Qualified zone academy bond.
- Qualified school construction bond.
A build America bond is any bond (other than a private activity bond) issued after February 17, 2009, and before January 1, 2011, by an issuer who makes an irrevocable election to have the rules of Internal Revenue Code section 54AA apply and except for that election, the interest on the bond would have been excludable from income under Internal Revenue Code section 103.
These bonds pay interest that is taxable. However, the bondholder is allowed a tax credit equal to 35% of the interest payable on the interest payment date of the bond. The credit is treated as taxable interest. Use Form 8912 to claim the credit for a build America bond.taxmap/pubs/p550-002.htm#en_us_publink10009975
The proceeds of these bonds are used to finance mortgage loans for homebuyers. Generally, interest on state or local government home mortgage bonds issued after April 24, 1979, is taxable unless the bonds are qualified mortgage bonds or qualified veterans' mortgage bonds. taxmap/pubs/p550-002.htm#en_us_publink10009976
Interest on arbitrage bonds issued by state or local governments after October 9, 1969, is taxable. An arbitrage bond is a bond any portion of the proceeds of which is expected to be used to buy (or to replace funds used to buy) higher yielding investments. A bond is treated as an arbitrage bond if the issuer intentionally uses any part of the proceeds of the issue in this manner. taxmap/pubs/p550-002.htm#en_us_publink10009977
Interest on a private activity bond that is not a qualified bond (defined below) is taxable. Generally, a private activity bond is part of a state or local government bond issue that meets both of the following requirements.
- More than 10% of the proceeds of the issue is to be used for a private business use.
- More than 10% of the payment of the principal or interest is:
- Secured by an interest in property to be used for a private business use (or payments for this property), or
- Derived from payments for property (or borrowed money) used for a private business use.
Also, a bond is generally considered a private activity bond if the amount of the proceeds to be used to make or finance loans to persons other than government units is more than 5% of the proceeds or $5 million (whichever is less).
Interest on a private activity bond that is a qualified bond is tax exempt. A qualified bond is an exempt-facility bond (including an enterprise zone facility bond, a New York Liberty bond, a Midwestern disaster area bond, a Hurricane Ike disaster area bond, a Gulf Opportunity Zone Bond treated as an exempt facility bond, or any recovery zone facility bond issued after February 17, 2009, and before January 1, 2011), qualified student loan bond, qualified small issue bond (including a tribal manufacturing facility bond), qualified redevelopment bond, qualified mortgage bond (including a Gulf Opportunity Zone Bond, a Midwestern disaster area bond, or a Hurricane Ike disaster area bond, treated as a qualified mortgage bond), qualified veterans' mortgage bond, or qualified 501(c)(3) bond (a bond issued for the benefit of certain tax-exempt organizations).
Interest that you receive on these tax-exempt bonds if issued after August 7, 1986, generally is a "tax preference item" and may be subject to the alternative minimum tax. See Form 6251 and its instructions for more information.
The interest on the following bonds is not a tax preference item and is not subject to the alternative minimum tax.
- Qualified 501(c)(3) bonds.
- New York Liberty bonds.
- Gulf Opportunity Zone bonds.
- Midwestern disaster area bonds.
- Hurricane Ike disaster area bonds.
- Exempt facility bonds issued after July 30, 2008.
- Qualified mortgage bonds issued after July 30, 2008.
- Qualified veterans' mortgage bonds issued after July 30, 2008.
The interest on any qualified bond issued in 2009 or 2010 is not a tax preference item and is not subject to the alternative minimum tax. For this purpose, a refunding bond (whether a current or advanced refunding) is treated as issued on the date the refunded bond was issued (or on the date the original bond was issued in the case of a series of refundings). However, this rule does not apply to any refunding bond that was issued to refund any qualified bond that was issued during 2004 through 2008.taxmap/pubs/p550-002.htm#en_us_publink10009979
Interest on certain private activity bonds issued by a state or local government to finance a facility used in an empowerment zone or enterprise community is tax exempt. For information on these bonds, see Publication 954. taxmap/pubs/p550-002.htm#en_us_publink10009980
New York Liberty bonds are bonds issued after March 9, 2002, to finance the construction and rehabilitation of real property in the designated "Liberty Zone" of New York City. Interest on these bonds issued before 2010 is tax exempt.taxmap/pubs/p550-002.htm#en_us_publink10009981
Market discount on a tax-exempt bond is not tax-exempt. If you bought the bond after April 30, 1993, you can choose to accrue the market discount over the period you own the bond and include it in your income currently, as taxable interest. See Market Discount Bonds
under Discount on Debt Instruments
, later. If you do not make that choice, or if you bought the bond before May 1, 1993, any gain from market discount is taxable when you dispose of the bond.
For more information on the treatment of market discount when you dispose of a tax-exempt bond, see Discounted Debt Instruments
under Capital or Ordinary Gain or Loss
in chapter 4.