Any interest that the taxpayer receives directly, or through credit in his account and is of the nature that it can be withdrawn at a future date without attracting any penalty or interest, is termed as taxable income. Bank interest rates, money market accounts, certificates of deposit, deposited insurance dividends, etc, are few examples of taxable interest income.
The interest on Series EEE and the series IUS bonds saving bonds are usually classified as tax-deferred bonds as tax need not be paid on these unless it matures and starts generating income. Interest from such bonds, which have been issued after the year 1989, is not taxable if it is generated to fund higher education expenses for that particular year. Form 815 explains the interest that needs to be excluded from redeemed US Savings bond whereas form 1040A, 1040 or Schedule B talks about excludable interest from the Series EEE bonds issued after 1989.
Dividends are actually interests on deposits or accounts with banks, credit unions, stocks held in the capital market, domestic building and loan associations, mutual savings banks, etc. The interest payer sends the Copy B of Form 1099- NT to the receiver, who in turn all the necessary paperwork to claim deductions for interest received. The Publication 550 or Publication 1212 gives more details about bonds or debt instruments that were originally offered at a discount. This explains that a part of the original discount must be included every year as interest charges.
Some interest incomes qualify for the federal income tax but are exempted from the state and local income taxes. These incomes include interest from Treasury Bills, notes and bonds. Interest income on some bonds that are used for financing government operations, or that are issued by the state government or by the District of Columbia or a US possession does not qualify even for the federal income tax. It is the duty of the taxpayer to duly submit all the interest details that are exempted from tax while filing tax returns. This is because the details submitted to the IRS should be complete and accurate. This is only for the records of the IRS and they would not charge any tax on this amount.
A nominee who receives the interest on behalf of the actual recipient should inform the IRS of the same and also furnish all these details to the actual recipient or recipients. The interest amount received by the nominee should be shown as a subtotal of all interest revenues listed under Schedule B of Form 1040 or Form 1040A. The nominee must fill-up the Form 1099-INT for the interest portion and hand over the copy B to the actual recipient.
If one receives interest income that qualifies for tax payment, then the same should be done by the receiver on time so that no interest charges or penalties are charged on them. The receiver of the interest should furnish accurate details about his social security number to the interest payer.