What is Taxable Interest Income?

Taxable interest income is taxable income a person receives in the form of interest. Interest is an amount of money a person earns on an investment or financial instrument. For example, a person who has a savings account, certificate of deposit, money market account, or other type of financial instrument may earn interest. While there are some types of interest income that are not subject to taxes, interest from these types of accounts is usually taxable.

When a person holds an interest-bearing account such as a savings account, he essentially deposits money into the account and allows a financial institution to make use of it until he is ready to remove it from his account. In exchange for using this money, financial institutions provide interest income. Some people may consider this free money and expect it to be separate from other income on which they must pay taxes. That is not the case, however, and when the time comes to pay taxes on income, each taxpayer is usually required to report the interest amount received, even if he didn’t remove it from his account.

Besides savings accounts, certificates of deposit, and other types of financial instruments, a person may also earn taxable interest income when providing a loan to another party. If, for example, a taxpayer loans another person or even a business money and charges interest on the loan, that interest may be taxable. In some places, taxpayers are expected to report interest income even if it is not taxable. For example, a person may receive tax-exempt interest income from a mutual fund. Though it is exempt from taxes, he may still be required to provide his tax authority with an accurate accounting of the amount he received.

An individual who earns taxable interest income won’t usually have a difficult time figuring out how much he has earned in order to file his taxes. In most cases, the business that paid the taxable interest income is required to provide the receiver with a form stating that he has earned interest income during the tax period and listing the amount earned. There is one exception, however. If a person has earned a very small amount of interest income, such as only a few dollars, financial institutions may not be required to provide him with an informational form. In such a case, he is usually expected to keep track of his interest on his own so that he can report it as required by his jurisdiction’s tax authority.