A bond is a type of debt security. The bond represents a loan from you to the issuer, which may be a corporation, a municipality or a government entity. In exchange for the loan, the issuer agrees to pay back the face value of the bond at maturity, in addition to making regular interest payments. The interest on bonds must be reported as part of your gross income on your federal income tax return, regardless of whether or not the interest is tax-exempt.
Determine whether your bonds pay interest that is taxable or tax-exempt. The interest on corporate bonds is typically fully taxable at the local, state and federal level. The interest on many municipal bonds is exempt from federal income tax and may be exempt from state and local taxes for taxpayers who reside in the issuing state. The interest on bonds issued by agencies of the federal government is exempt from state and local income taxes but is taxable at the federal level.
Add the interest you received from all taxable bonds. Enter the total amount on Line 8a of IRS Form 1040. If the total amount of interest from your taxable bonds exceeds $1,500 you must also complete IRS Form 1040, Schedule B. Schedule B requires you to list the name of each payer and the amount of interest you received.
Add the interest you received from all tax-exempt bonds. Enter this amount on Line 8b of IRS Form 1040. You should not report any interest earned from bonds that are held in your individual retirement account, medical savings account or Coverdell educational savings account, even though this interest is tax-exempt.
Report all of your other income on Lines 7 through 21 of IRS Form 1040. Add the amounts reported on Lines 7, 8a, 9a, 10 through 14, 15b, 16b, 17, 18, 19, 20b and 21. Enter the sum on Line 22. This is your gross income. Your gross income will include your taxable bond interest income, but it will not include your tax-exempt bond income.
- U.S. savings bonds offer you the option of reporting and paying taxes on your interest each year, or of deferring your taxes until you cash in the bond.
- Tax-exempt interest on municipal bonds may be subject to income taxes if you are subject to the alternative minimum tax.
Items you will need
- IRS Form 1099-INT from each bond issuer
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