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Although it May Seem like Free Money, Interest Income is rarely Tax-free

Here is a Tutorial on the interest income from 1099-INT:

Consider yourself fortunate if you get a form 1099-INT (1099 interest income) in the mail. Although it’s another tax paper work to remember, it’s also a success: It implies that throughout the past year, you most likely earned interest of more than $10. That’s quite good with rates close to nothing.

You must legally disclose interest income on your tax returns. Financial institutions, however, are not required to give you a 1099-INT unless you have accrued interest income of at least $10 over the previous year.

Even if you earn interest of more than $10, you might still need to register into your account online in order to get your own form 1099 online. After all, banks lose money by paying for mail.

Although it May Seem like Free Money, Interest Income is rarely Tax-free

Understanding your 1099-INT:

A 1099-INT should resemble the illustration below, with the exception that yours should have money in the tiny numbered boxes on the right side, unlike the example.

In each box, many sources of revenue are displayed.

A 1099-INT that has only a few boxes filled in will typically be given to recipients. That is customary. Very frequently, just box 1 will contain amounts. There, “plain-vanilla” interest on a checking, savings, or money market account is disclosed.

Box 2 is likewise quite typical. Early withdrawal penalties show up there. This amount will be displayed if you redeemed a certificate of deposit early and lost any accrued interest or principal. The next several boxes have clear instructions. Federal income taxes deducted from your interest income appear in box 3, interest on U.S. savings bonds and Treasury securities appears in box 4, and so on.

Boxes 10–13 can be a little challenging, but they are less typical. Bonds can be bought for less or more than their face value.

Discounts may be amortized (broken down into equal annual payments) and considered income. On the other hand, if you paid a premium on a bond (let’s say, $1,050 for a $1,000 bond), the premium can be deducted from your interest income. These sums would appear in the relevant box.

Added suggestions:

Do not worry if you misplace a 1099-INT. Your ability to stay organized is unimportant to the IRS; all it asks is that you accurately disclose all of your revenue. Although the majority of organizations ought to be content to send you a new copy, you may always claim your interest income on your taxes even if you don’t have one.

For instance, a December bank statement should reveal how much interest you made that year, giving you the necessary details to properly claim the interest income. Last but not least, if at all possible, try to save your form 1099-INTs for a minimum of three years. If you make a mistake and don’t claim all of your income, the IRS has that much time to audit you. When you truly need the documents, you’ll be glad you have them nearby if that occurs.

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