Lesson 1 of 7
Interest Income
Rita slid three envelopes across the desk.
“My daughter said I needed to bring everything that came in the mail,” she said. “Even the small ones.”
Veronica picked them up one at a time. W-2 from her part-time job. A statement from the county property appraiser — not tax-related. And a small form from Suncoast Credit Union.
She opened the third one. 1099-INT. Box 1: $74.
“Did you know you had interest income?” Veronica asked.
“I have a savings account,” Rita said. “They send me something every year. I never thought it mattered.”
Veronica made a note. “It does. Seventy-four dollars is taxable income. Small — but we report it.”
Interest income is one of the most common forms of “other income” you’ll see in a tax office. Almost every client with a savings account, a CD, or a money market account earns at least a little interest every year. It comes with a form. The form is simple. The entry is easy. But you have to know to look for it.
💬 Rita Brings In an Unfamiliar Form
👴
Rita
I keep getting these in the mail from my bank. My daughter says to bring them but I never know what they are.
V
Veronica
Let’s take a look. This is a Form 1099-INT — it reports interest income your savings account paid you during the year. See Box 1? That’s the amount.
👴
Rita
Seventy-four dollars. That’s it?
V
Veronica
That’s it. Small, but it’s income and we report it.
👴
Rita
I didn’t realize the bank was paying me anything.
V
Veronica
Most savings accounts pay a little interest. The bank is required to report it to the IRS if it’s $10 or more — and a copy goes to you. That’s the form you’re holding.
💬 Rita Brings In an Unfamiliar Form
👴
Rita
I keep getting these in the mail from my bank. My daughter says to bring them but I never know what they are.
V
Veronica
Let’s take a look. This is a Form 1099-INT — it reports interest income your savings account paid you during the year. See Box 1? That’s the amount.
👴
Rita
Seventy-four dollars. That’s it?
V
Veronica
That’s it. Small, but it’s income and we report it.
👴
Rita
I didn’t realize the bank was paying me anything.
V
Veronica
Most savings accounts pay a little interest. The bank is required to report it to the IRS if it’s $10 or more — and a copy goes to you. That’s the form you’re holding.
💬 Rita Brings In an Unfamiliar Form
👴
Rita
I keep getting these in the mail from my bank. My daughter says to bring them but I never know what they are.
V
Veronica
Let’s take a look. This is a Form 1099-INT — it reports interest income your savings account paid you during the year. See Box 1? That’s the amount.
👴
Rita
Seventy-four dollars. That’s it?
V
Veronica
That’s it. Small, but it’s income and we report it.
👴
Rita
I didn’t realize the bank was paying me anything.
V
Veronica
Most savings accounts pay a little interest. The bank is required to report it to the IRS if it’s $10 or more — and a copy goes to you. That’s the form you’re holding.
What Is Interest Income?
Interest income is money a financial institution pays you for keeping your money there. Banks pay interest on savings accounts, money market accounts, and certificates of deposit (CDs). The rate is usually small, but the income is real and taxable.
The form is 1099-INT. Any bank or financial institution that paid $10 or more in interest during the year is required to send one. The key boxes:
Box 1 — Interest Income. The main number. Taxable interest paid to the account holder. Goes directly on Schedule B and flows to Form 1040.
Box 3 — Interest on U.S. Savings Bonds and Treasury Obligations. This interest is taxable federally but exempt from state tax. Your software handles the distinction when you enter it correctly.
Box 4 — Federal Income Tax Withheld. Rarely populated, but if a client had backup withholding, it shows here.
Box 8 — Tax-Exempt Interest. Municipal bond interest. Exempt from federal income tax. Still reported on the return but not added to taxable income.
💬 Rita and the 1099-INT
👴
Rita
Seventy-four dollars. Do I really have to put that on there?
V
Veronica
I know it seems small, but yes. All interest income is taxable regardless of the amount.
👴
Rita
Will it make a difference to my taxes?
V
Veronica
Probably a few dollars. But more importantly — the bank already reported this to the IRS. If it’s on the 1099, the IRS has it. We want our return to match.
👴
Rita
Oh, I didn’t realize the bank tells them.
V
Veronica
Every year by January 31. That’s exactly why we bring everything.
When There’s No 1099-INT
Banks only send a 1099-INT if they paid $10 or more in interest. Below that threshold, no form is required. But the interest is still taxable. Your job: always ask.
💬 Did You Earn Any Bank Interest?
V
Veronica
Do you have any bank or savings accounts that might have paid you interest this year?
🚫
Anthony
I have a savings account at Wells Fargo. I don’t think I got a form.
V
Veronica
If it was under $10, they may not have sent one. Do you have online access to the account?
V
Veronica
Can you pull it up and check? Even a few dollars is technically taxable. And if Wells Fargo reported anything to the IRS, we need it on the return.
✅ Quick Check
Rita earned $74 in savings account interest. Her bank sent her a 1099-INT. Is this taxable?
Yes. All interest income is taxable regardless of the amount. It goes on Schedule B and flows to Form 1040 Line 2b.
The $10 threshold determines whether the bank must send a form — not whether the income is taxable.
💬 What About My CD?
👴
Rita
I also have a CD at the bank. Does that count the same way?
V
Veronica
Yes. CDs pay interest just like savings accounts. Did you receive a separate 1099-INT for the CD?
👴
Rita
I think it’s a different envelope. I might have left it at home.
V
Veronica
That’s okay — you can pull it up online through your bank account. We need the exact number from Box 1. CDs sometimes pay more interest than regular savings, so it’s worth checking.
💬 What About My CD?
👴
Rita
I also have a CD at the bank. Does that count the same way?
V
Veronica
Yes. CDs pay interest just like savings accounts. Did you receive a separate 1099-INT for the CD?
👴
Rita
I think it’s a different envelope. I might have left it at home.
V
Veronica
That’s okay — you can pull it up online through your bank account. We need the exact number from Box 1. CDs sometimes pay more interest than regular savings, so it’s worth checking.
💬 What About My CD?
👴
Rita
I also have a CD at the bank. Does that count the same way?
V
Veronica
Yes. CDs pay interest just like savings accounts. Did you receive a separate 1099-INT for the CD?
👴
Rita
I think it’s a different envelope. I might have left it at home.
V
Veronica
That’s okay — you can pull it up online through your bank account. We need the exact number from Box 1. CDs sometimes pay more interest than regular savings, so it’s worth checking.
Other Sources of Interest Income
Certificates of Deposit (CDs). Fixed-term savings instruments. Interest is taxable when it’s credited to the account or made available, even if the client didn’t withdraw it. Long-term CDs often generate 1099-INT in years when the CD hasn’t matured.
Seller-Financed Mortgages. If a client sold property and is collecting monthly payments with interest from the buyer, that interest income is reported on a 1099-INT or directly on Schedule B. Ask any client who sold real estate: “Are you receiving payments from the buyer, or was it a traditional bank sale?”
U.S. Savings Bonds. Taxable federally, tax-exempt at the state level. The interest is often deferred until the bond matures or is redeemed. When the client cashes a savings bond, expect a 1099-INT for the accumulated interest.
💡 Stop & Think
Rita has two savings accounts — one at a credit union that paid $74 in interest, and one at a national bank that paid $8. She only received a 1099-INT for the credit union account. What should Veronica do about the $8?
Answer:
Report it anyway. Interest income under $10 is still taxable even without a 1099-INT. Ask Rita to confirm the amount from her bank statement and include it. The bank may have reported it to the IRS even without sending Rita a form.
🏢
🏢 Real Office Scenario
A client brings a stack of mail including three 1099-INT forms: one from a bank ($240 interest), one from a credit union ($18), and one from a brokerage account ($112). All three go on Schedule B. Total interest income: $370. The brokerage 1099-INT also shows Box 8 tax-exempt interest of $85 from a municipal bond fund — that gets reported on 1040 Line 2a but is not added to taxable income. Your software handles the distinction when you enter each form separately.
📍
Pro Tip — Ask About Every Financial Account
At intake, ask: “Do you have any savings accounts, CDs, money market accounts, or bonds?” Most clients don’t volunteer 1099-INT forms because they think the amounts are too small to matter. They matter. And the IRS already has them.
⚠️
⚠️ Common Beginner Mistake
Assuming no 1099-INT means no interest income. The $10 reporting threshold is a filing requirement for the bank, not a taxability threshold for the client. A client with $8 in bank interest and no form still has $8 in taxable income. Always ask about bank accounts regardless of whether a form arrived.
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⚠️ Common Beginner Mistake
Seeing a small 1099-INT and deciding it’s not worth entering. A $12 interest amount takes ten seconds to enter, and the IRS already has it on file from the bank. A return that doesn’t match what the IRS received generates a notice. Every 1099, no matter how small, gets entered.
⚠️
⚠️ Common Beginner Mistake
Seeing a small 1099-INT and deciding it’s not worth entering. A $12 interest amount takes ten seconds to enter, and the IRS already has it on file from the bank. A return that doesn’t match what the IRS received generates a notice. Every 1099, no matter how small, gets entered.
⚠️
⚠️ Common Beginner Mistake
Seeing a small 1099-INT and deciding it’s not worth entering. A $12 interest amount takes ten seconds to enter, and the IRS already has it on file from the bank. A return that doesn’t match what the IRS received generates a notice. Every 1099, no matter how small, gets entered.
1099-INTInterest Income. Sent by financial institutions that paid $10 or more in interest during the year.
Schedule BThe IRS schedule used to report interest and dividend income over $1,500, or any tax-exempt interest.
Taxable InterestInterest income subject to federal income tax. Includes bank interest, CD interest, and most savings bond interest.
Tax-Exempt InterestInterest income not subject to federal income tax. Municipal bond interest is the most common example.
Backup WithholdingIRS-required 24% withholding on interest if the account holder hasn't provided a correct TIN. Shows in Box 4.
📋 From the Desk of Ralph Martinez
Interest income is the easiest other-income item to miss because clients don't think it matters. "$74 from my savings account" — they almost never bring it up on their own. My rule: every client gets asked about bank accounts. Every time. It takes ten seconds and it keeps the return clean.
— Ralph Martinez · Ruskin, FL · Est. 2001