Taxable Interest

• When you earn interest during the year, the bank or company paying it has an obligation to report it on a Form 1099-INT. Both you and the IRS will receive a copy of this form before you even start preparing your tax return, so it's important that you transfer all amounts from each 1099 you receive to your tax return. Taxable interest that is reported on the 1099 includes the interest you earn from bank accounts, interest payments from corporate bonds and any payments you receive for U.S. Treasury bills and bonds you invest in. As a general guideline, you should include all interest on your tax return unless there is a tax law that specifically excludes it, even if it's only $1.
  
  

Interest to Exclude

• You may earn significant amounts of interest each year that the government exempts from federal income taxation. Frequently, this includes any municipal bond interest payments you receive during the year. A municipal bond is essentially a loan you make to a state or local government in return for a promise of repayment of the balance plus interest. You also need to exclude the interest that you earn but yet are to receive during the tax year. Generally, the IRS only taxes you when you actually receive an interest payment, not when you earn it.
  
  

Schedule B Requirement

• In some cases, the IRS will require you to prepare a Schedule B attachment to your tax return to provide more detailed information about your interest payments. Although there are a wide range of situations that will require the filing of a Schedule B, most taxpayers find themselves filing one because they earn over $1,500 of interest during the tax year. Filling out the form is fairly simple and requires the same information that you can find on your 1099-INTs, such as the payor and account information.
  
  

Choosing Correct Forms

• One thing you should be aware of when you earn significant amounts of interest during the year, namely more than $1,500, is that you are no longer eligible to prepare your tax return on Form 1040-EZ. This is because you can only file a Schedule B with a Form 1040 or 1040A. And since you have no discretion in deciding whether to file a Schedule B, you must choose one of the two forms. If you don't plan on claiming any adjustments to income other than student loan interest and the IRA deduction and are not eligible to itemize, then you can choose the 1040A, which is shorter than the full-length 1040.