How to Report Interest Income from a Savings Account or CD

 Introduction

Interest earned on a savings account or certificate of deposit (CD) is considered taxable income and must be reported to the IRS. Banks and credit unions issue Form 1099-INT to account holders who earn at least $10 in interest during the tax year.

This guide explains how to report savings account and CD interest on IRS Form 1040, what forms to use, and how interest income impacts your tax liability.

 Tax Code References for Savings Account and CD Interest

• IRC § 61(a)(4) – Defines interest as taxable income.
• IRC § 6041 – Requires financial institutions to report interest income to the IRS.
• IRC § 1272 – Covers original issue discount (OID) income, relevant for long-term CDs.

 Relevant IRS Forms for Reporting Interest Income

• Form 1099-INT – Reports taxable interest from savings accounts and CDs.
• Schedule B (Form 1040) – Required if total interest income exceeds $1,500.
• Form 1040, Line 2b – Reports total taxable interest.

 What Is Taxable Interest from a Savings Account or CD?

Savings Account Interest

• Earned daily or monthly based on account balance.
• Fully taxable at both federal and state levels.

CD Interest

• Interest may be compounded monthly, quarterly, or annually.
• If CDs have a maturity over one year, part of the interest is taxable annually under OID rules.

When Is Interest Taxed?

• Savings account interest is taxed in the year it is credited.
• CD interest is taxed annually, even if not withdrawn before maturity.

5. Step-by-Step Guide to Reporting Interest Income on IRS Form 1040

Step 1: Gather Your Form 1099-INT

• Banks issue Form 1099-INT if you earn at least $10 in interest.
• If you earn less than $10, you must still report the income, even if no form is received.

Step 2: Report Savings Account and CD Interest on Form 1040

• Line 2b of Form 1040 – Enter total taxable interest from Form 1099-INT, Box 1.
• Schedule B (Form 1040) – If total interest exceeds $1,500, list each interest source.

Step 3: Adjust for Penalties on Early Withdrawals

• If you incur a penalty for early CD withdrawal, report the penalty on Schedule 1, Line 18 (Form 1040) to reduce taxable income.

Step 4: File Your Tax Return

• Attach Schedule B if required and verify that interest income is correctly reported.

  Example Scenarios for Reporting Savings and CD Interest

Example 1: Savings Account Interest Under $1,500

• Tom earned $600 in savings account interest from Wells Fargo.
• He received Form 1099-INT, reporting $600 in Box 1.
• Tom reports $600 on Line 2b of Form 1040.

Example 2: CD Interest from a Long-Term Investment

• Emily earned $3,200 in CD interest from Chase Bank.
• Since her total interest exceeds $1,500, she files Schedule B and lists each interest source.
• She reports $3,200 on Line 2b of Form 1040.

Example 3: Early Withdrawal Penalty on a CD

Mike withdrew his CD early and paid a $200 penalty.

He reports $200 as a deduction on Schedule 1, Line 18 (Form 1040).

  Common Mistakes to Avoid

• Not reporting interest under $10 – Even if Form 1099-INT is not issued, all interest must be reported.
• Failing to include CD interest each year – CD interest is taxable annually, even if not withdrawn.
• Forgetting to deduct early withdrawal penalties – If CDs are closed early, penalties can reduce taxable income.

 IRS Compliance Requirements

• Report all savings and CD interest on Line 2b of Form 1040.
• File Schedule B if total interest exceeds $1,500.
• Deduct early withdrawal penalties on Schedule 1.
• Retain Form 1099-INT records for IRS verification.

  Conclusion

Interest earned on savings accounts and CDs is taxable and must be properly reported to the IRS. While CDs offer higher interest rates, taxes on accrued interest must be paid annually.

For expert tax guidance on reporting interest income, consult Anshul Goyal, CPA EA FCA, a Certified Public Accountant and IRS compliance expert.

  FAQs

1. Do I have to report interest income if I didn’t receive a 1099-INT?
Yes, all interest income is taxable, even if you did not receive a tax form.

2. When do I report CD interest if it hasn’t matured yet?
CD interest is taxed annually, even if not withdrawn before maturity.

3. Are early withdrawal penalties from CDs tax-deductible?
Yes, early withdrawal penalties are deducted on Schedule 1, Line 18 (Form 1040).

4. Where do I report interest from multiple accounts?
List all interest sources on Schedule B if total interest exceeds $1,500.

5. Is interest from savings accounts and CDs subject to state taxes?
Yes, savings and CD interest is generally taxable at both the federal and state levels.

 About Our CPA

Anshul Goyal, CPA EA FCA, is a Certified Public Accountant and IRS compliance expert specializing in interest income reporting, tax deductions, and financial planning.

For personalized tax assistance, schedule a consultation with Anshul Goyal, CPA EA FCA today.