Publication 17
taxmap/pub17/p17-032.htm#en_us_publink1000171435Taxable 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/pub17/p17-032.htm#en_us_publink1000171436Certain 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 pay dividends and are offered by nonbank financial
institutions, such as mutual funds and stock brokerage houses. Generally,
amounts you receive from money market funds should be reported as dividends, not
as interest.
taxmap/pub17/p17-032.htm#en_us_publink1000171438If 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), later.
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
in chapter 1 of Publication 550 for more information on how to report the
interest and deduct the penalty.
taxmap/pub17/p17-032.htm#en_us_publink1000171441The 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 of Publication 550.
taxmap/pub17/p17-032.htm#en_us_publink1000171442You 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 2010, 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 2010 showing
the $575 interest you earned. The bank also gives you a statement showing that
you paid $310 interest for 2010. 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/pub17/p17-032.htm#en_us_publink1000171443If 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/pub17/p17-032.htm#en_us_publink1000171444You 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/pub17/p17-032.htm#en_us_publink1000171445Interest 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/pub17/p17-032.htm#en_us_publink1000171446Any 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/pub17/p17-032.htm#en_us_publink1000171447Interest 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/pub17/p17-032.htm#en_us_publink1000171448Interest you receive on tax refunds is taxable income.
taxmap/pub17/p17-032.htm#en_us_publink1000171449If the condemning authority pays you interest to compensate you
for a delay in payment of an award, the interest is taxable.
taxmap/pub17/p17-032.htm#en_us_publink1000171450If 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, Installment Sales.
taxmap/pub17/p17-032.htm#en_us_publink1000171451Accumulated interest on an annuity contract you sell before its
maturity date is taxable.
taxmap/pub17/p17-032.htm#en_us_publink1000171452Usurious 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/pub17/p17-032.htm#en_us_publink1000171453Exclude 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 where 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 2010, see
Frozen deposits under
How To Report Interest Income
in chapter 1 of Publication 550, 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/pub17/p17-032.htm#en_us_publink1000171454$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/pub17/p17-032.htm#en_us_publink1000171455If 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 it is received or accrued. See
Bonds Sold Between Interest Dates, later, for more information.
In general, a below-market loan is a loan on which no interest
is charged or on which interest is charged at a rate below the applicable
federal rate. See
Below-Market Loans in chapter 1 of Publication 550 for more information.
taxmap/pub17/p17-032.htm#en_us_publink1000171458This 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.
 | For other information on U.S. savings bonds, write to:
For series EE and I:
Bureau of the Public Debt
Division of Customer Assistance
P.O. Box 7012
Parkersburg, WV 26106-7012
For series HH/H:
Bureau of the Public Debt
Division of Customer Assistance
P.O. Box 2186
Parkersburg, WV 26106-2186
|
taxmap/pub17/p17-032.htm#en_us_publink1000171461If 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. Accrual methods of
accounting are explained in chapter 1 under
Accounting Methods.
taxmap/pub17/p17-032.htm#en_us_publink1000171462If you use the cash method of accounting, as most individual
taxpayers do, you generally report the interest on U.S. savings bonds when you
receive it. The cash method of accounting is explained in chapter 1 under
Accounting Methods. But see
Reporting options for cash method taxpayers, later.
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 and 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/pub17/p17-032.htm#en_us_publink1000171464Interest on these bonds is payable when you redeem the bonds.
The difference between the purchase price and the redemption value is taxable
interest.
taxmap/pub17/p17-032.htm#en_us_publink1000171465Series EE bonds were first offered in January 1980 and have a
maturity period of 30 years.
taxmap/pub17/p17-032.htm#en_us_publink1000171466Before 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/pub17/p17-032.htm#en_us_publink1000171467Series 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/pub17/p17-032.htm#en_us_publink1000171468If 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 they mature. (However, see
Savings bonds traded, later.)
Note.
Series E and EE bonds issued in 1980 matured in 2010. If you have used method 1,
you generally must report the interest on these bonds on your 2010 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 you will
pay for higher education 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, later. |
taxmap/pub17/p17-032.htm#en_us_publink1000171472If 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/pub17/p17-032.htm#en_us_publink1000171473To 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
Attention: CC:IT&A (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, Application for Change
in Accounting Method. In that case, follow the form instructions for an
automatic change. No user fee is required.
taxmap/pub17/p17-032.htm#en_us_publink1000171475If 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/pub17/p17-032.htm#en_us_publink1000171476
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 taxable to
you. The co-owner who redeemed the bond is a "nominee." See
Nominee distributions
under How To Report Interest Income
in chapter 1 of Publication 550 for more information about how a person who is a
nominee reports interest income belonging to another person.
taxmap/pub17/p17-032.htm#en_us_publink1000171477If 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/pub17/p17-032.htm#en_us_publink1000171478If 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/pub17/p17-032.htm#en_us_publink1000171479These rules are also shown in Table 7-1.
taxmap/pub17/p17-032.htm#en_us_publink1000171480If 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/pub17/p17-032.htm#en_us_publink1000171481If 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/pub17/p17-032.htm#en_us_publink1000171482Table 7-1. 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. |
|
taxmap/pub17/p17-032.htm#en_us_publink1000171484You 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/pub17/p17-032.htm#en_us_publink1000171485You 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
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. You must report half
the interest earned to the date of reissue.
taxmap/pub17/p17-032.htm#en_us_publink1000171486If 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, later.
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. This is explained in
chapter 1 of Publication 550.
taxmap/pub17/p17-032.htm#en_us_publink1000171489If 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/pub17/p17-032.htm#en_us_publink1000171490
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/pub17/p17-032.htm#en_us_publink1000171491You could have chosen to treat all of the previously unreported
accrued interest on the 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, earlier.
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 chapter, 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.)
For more information on including the correct amount of interest
on your return, see
How To Report Interest Income, later. Publication 550 includes examples showing how to report
these amounts.
| 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 bond interest in box 3. |
taxmap/pub17/p17-032.htm#en_us_publink1000171497You 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/pub17/p17-032.htm#en_us_publink1000171498Use Form 8815 to figure your exclusion. Attach the form to your
Form 1040 or Form 1040A.
taxmap/pub17/p17-032.htm#en_us_publink1000171499A 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.
|
taxmap/pub17/p17-032.htm#en_us_publink1000171501You can designate any individual (including a child) as a beneficiary
of the bond.
taxmap/pub17/p17-032.htm#en_us_publink1000171502If you claim the exclusion, the IRS will check it by using bond
redemption information from the Department of the Treasury.
taxmap/pub17/p17-032.htm#en_us_publink1000171503Qualified 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.
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/pub17/p17-032.htm#en_us_publink1000171504These institutions include most public, private, and nonprofit
universities, colleges, and vocational schools that are accredited and eligible
to participate in student aid programs run by the U.S. Department of Education.
taxmap/pub17/p17-032.htm#en_us_publink1000171505You must reduce your qualified higher educational expenses by
all of the following tax-free benefits.
- Tax-free part of scholarships and fellowships (see
Scholarships and fellowships in chapter 12).
- 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
for educational expenses, such as
- Veterans' educational assistance benefits,
- Qualified tuition reductions, or
- Employer-provided educational assistance.
- Any expense used in figuring the American Opportunity and
lifetime learning credits.
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 of the fraction is the qualified
higher educational expenses you paid during the year. The denominator of the
fraction is the total proceeds you received during the year.
taxmap/pub17/p17-032.htm#en_us_publink1000171508In February 2010, 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 2010, 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 2010. They must pay tax on the remaining $1,586 ($3,124
− $1,538) interest.
taxmap/pub17/p17-032.htm#en_us_publink1000171509The interest exclusion is limited if your modified adjusted gross
income (modified AGI) is:
- $70,100 to $85,100 for taxpayers filing single or head of
household, and
- $105,100 to $135,100 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 student loan interest, and
- Deduction for domestic production activities.
| At the time this publication went to print, Congress was
considering legislation that would extend the deduction for tuition and fees
that expired at the end of 2009. If extended, this deduction also would be added
back to determine modified AGI. To find out if this legislation was enacted, and
for more details, go to IRS.gov or see Publication 550, Investment Income and
Expenses. |
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 and 7), add the amount of the exclusion or
deduction (except any deduction for 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.
If you have investment interest expense incurred to earn royalties
and other investment income, see
Education Savings Bond Program in chapter 1 of Publication 550.
 | 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 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.
|
taxmap/pub17/p17-032.htm#en_us_publink1000171511Treasury bills, notes, and bonds are direct debts (obligations)
of the U.S. Government.
taxmap/pub17/p17-032.htm#en_us_publink1000171512Interest 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 interest (in box 3) 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/pub17/p17-032.htm#en_us_publink1000171513These 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.
taxmap/pub17/p17-032.htm#en_us_publink1000171514Treasury 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 generally are issued in denominations of $100 to $1 million and generally
pay interest every 6 months. Generally, you report this interest for the year
paid. For more information, see
U.S. Treasury Bills, Notes, and Bonds in chapter 1 of Publication 550.
| For other information on Treasury notes or bonds, write to:
Bureau of The Public Debt
P.O. Box 7015
Parkersburg, WV 26106-7015
|
For information on series EE, series I, and series HH savings
bonds, see
U.S. Savings Bonds, earlier.
These securities pay interest twice a year at a fixed rate, based
on a principal amount 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), in Publication 550.
taxmap/pub17/p17-032.htm#en_us_publink1000171519If 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
in chapter 1 of Publication 550 for information on reporting the payment.
taxmap/pub17/p17-032.htm#en_us_publink1000171520Life 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 a part of each installment payment as interest income.
For more information about insurance proceeds received in installments,
see Publication 525, Taxable and Nontaxable Income.
taxmap/pub17/p17-032.htm#en_us_publink1000171521If 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
chapter 10 for information on pension and annuity income from nonqualified
plans.
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
possession of the United States, or any of their political subdivisions.
Bonds issued after 1982 (including tribal economic development
bonds issued after February 17, 2009) by an Indian tribal government 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 proceeds are to be used in
the exercise of any essential government function.
For information on federally guaranteed bonds, mortgage revenue
bonds, arbitrage bonds, private activity bonds, qualified tax credit bonds, and
Build America bonds, see
State or Local Government Obligations in chapter 1 of Publication 550.
taxmap/pub17/p17-032.htm#en_us_publink1000171524If 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.
taxmap/pub17/p17-032.htm#en_us_publink1000171525Original issue discount (OID) is a form of interest. You generally
include OID in your income as it accrues over the term of the debt instrument,
whether or not you receive any payments from the issuer.
A debt instrument generally has OID when the instrument is issued
for a price that is less than its stated redemption price at maturity. OID is
the difference between the stated redemption price at maturity and the issue
price.
All debt instruments that pay no interest before maturity are
presumed to be issued at a discount. Zero coupon bonds are one example of these
instruments.
The OID accrual rules generally do not apply to short-term obligations
(those with a fixed maturity date of 1 year or less from date of issue). See
Discount on Short-Term Obligations in chapter 1 of Publication 550.
taxmap/pub17/p17-032.htm#en_us_publink1000171526You can treat the discount as zero if it is less than one-fourth
of 1% (.0025) of the stated redemption price at maturity multiplied by the
number of full years from the date of original issue to maturity. This small
discount is known as
"de minimis" OID.
taxmap/pub17/p17-032.htm#en_us_publink1000171527You bought a 10-year bond with a stated redemption price at maturity
of $1,000, issued at $980 with OID of $20. One-fourth of 1% of $1,000 (stated
redemption price) times 10 (the number of full years from the date of original
issue to maturity) equals $25. Because the $20 discount is less than $25, the
OID is treated as zero. (If you hold the bond at maturity, you will recognize
$20 ($1,000 − $980) of capital gain.)
taxmap/pub17/p17-032.htm#en_us_publink1000171528The facts are the same as in
Example 1, except that the bond was issued at $950. The OID is $50. Because
the $50 discount is more than the $25 figured in
Example 1, you must include the OID in income as it accrues over the
term of the bond.
taxmap/pub17/p17-032.htm#en_us_publink1000171529If you buy a debt instrument with
de minimis
OID at a premium, the discount is not includible in income. If you buy a debt
instrument with
de minimis
OID at a discount, the discount is reported under the market discount rules. See
Market Discount Bonds in chapter 1 of Publication 550.
taxmap/pub17/p17-032.htm#en_us_publink1000171530The OID rules discussed in this chapter do not apply to the following
debt instruments.
- Tax-exempt obligations. (However, see
Stripped tax-exempt obligations under
Stripped Bonds and Coupons in chapter 1 of Publication 550).
- U.S. savings bonds.
- Short-term debt instruments (those with a fixed maturity date
of not more than 1 year from the date of issue).
- Obligations issued by an individual before March 2, 1984.
- Loans between individuals, if all the following are true.
- The lender is not in the business of lending money.
- The amount of the loan, plus the amount of any outstanding
prior loans between the same individuals, is $10,000 or less.
- Avoiding any federal tax is not one of the principal purposes
of the loan.
The issuer of the debt instrument (or your broker, if you held
the instrument through a broker) should give you Form 1099-OID, Original Issue
Discount, or a similar statement, if the total OID for the calendar year is $10
or more. Form 1099-OID will show, in box 1, the amount of OID for the part of
the year that you held the bond. It also will show, in box 2, the stated
interest you must include in your income. A copy of Form 1099-OID will be sent
to the IRS. Do not file your copy with your return. Keep it for your records.
In most cases, you must report the entire amount in boxes 1 and
2 of Form 1099-OID as interest income. But see
Refiguring OID shown on Form 1099-OID, later in this discussion, for more information.
If you had OID for the year but did not receive a Form 1099-OID
you can find tables on IRS.gov that list total OID on certain debt instruments
and have information that will help you figure OID. The tables are available at
www.irs.gov/formspubs/article/0,,id=213465,00.html. If your debt instrument is not listed, consult the issuer
for further information about the accrued OID for the year.
If someone else is the holder of record (the registered owner)
of an OID instrument belonging to you and receives a Form 1099-OID on your
behalf, that person must give you a Form 1099-OID.
taxmap/pub17/p17-032.htm#en_us_publink1000171535You must refigure the OID shown in box 1 or box 6 of Form 1099-OID
if either of the following apply.
- You bought the debt instrument after its original issue and
paid a premium or an acquisition premium.
- The debt instrument is a stripped bond or a stripped coupon
(including certain zero coupon instruments).
For information about figuring the correct amount of OID to
include in your income, see
Figuring OID on Long-Term Debt Instruments in Publication 1212.
If you disposed of a debt instrument or acquired it from another
holder during the year, see
Bonds Sold Between Interest Dates, earlier, for information about the treatment of periodic interest
that may be shown in box 2 of Form 1099-OID for that instrument.
If you buy a CD with a maturity of more than 1 year, you must
include in income each year a part of the total interest due and report it in
the same manner as other OID.
This also applies to similar deposit arrangements with banks,
building and loan associations, etc., including:
- Time deposits,
- Bonus plans,
- Savings certificates,
- Deferred income certificates,
- Bonus savings certificates, and
- Growth savings certificates.
CDs issued after 1982 generally must be in registered form. Bearer
CDs are CDs not in registered form. They are not issued in the depositor's name
and are transferable from one individual to another.
Banks must provide the IRS and the person redeeming a bearer
CD with a Form 1099-INT.
taxmap/pub17/p17-032.htm#en_us_publink1000171540See chapter 1 of Publication 550 for more information about OID
and related topics, such as market discount bonds.
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