Q: Tax Playa, I know that I have to pay taxes on some interest and not others. How can I tell the difference?
Margaret, Washington DC
A: In general, interest income is taxable to the recipient. A big exception is interest generated from most municipal (state and local government) bonds.
Any interest-bearing account that generates more than $10 in interest income must send you a form 1099-INT to report the interest. You then report all interest on your Form 1040.
If you have more than $1500 or either interest or dividends, this must be separately itemized on your Form 1040, Schedule B. You will also be asked about the ownership of foreign interest-earning securities.
An important exception to this rule is if you receive municipal bond interest, which is generated from the debt of state and local governments. This is generally free of federal taxation (and state taxation in the state issued). Tax-exempt interest (which carries a lower interest rate to reflect this subsidy) is reported on the 1040, but no tax is due.
If you are in AMT, municipal bond interest that goes for "private activities" (think: sports stadiums) must be added back into income as an AMT preference.
Another exception (though rarely used) is interest on Series EE and I federal savings bonds that is used for qualified higher education expenses for taxpayers earning AGI of less than $76,200 for singles/heads of households, or $121,850 for married filing jointly/qualifying widower (annually adjusted for inflation, obviously). Report this by attaching Form 8815.
Federal savings bond interest is tax-deferred, meaning that you don't need to pay the tax on the interest until the bond matures or it is cashed out, whatever happens first. Federal debt interest is also usually free of state taxation.
If you cash out a life insurance contract, the value of the cash-out that exceeds premiums paid is interest taxable to you. If the insurance contract is executed and a death benefit is paid, though, this is tax-free income.
How do I find a copy or list of municipal bonds that were puchased many years ago by a relative,which do not mature until 2011?
Posted by: Peggy | 2007.02.06 at 04:07 PM