Savings interest, CDs, I bonds and Treasuries: what's taxable

Interest is ordinary income, taxed at your regular rate rather than at the rates that apply to capital gains. What changes from one product to the next is not the rate but the year the interest lands on your return.

The form, and reporting without one

Once a payer credits you $10 or more of interest, taxable or tax-exempt, a Form 1099-INT or a Form 1099-OID should follow, sometimes buried inside a composite statement from a broker. Interest a business pays you alongside something else, such as damages, reaches a form only at a far larger amount, six hundred dollars.

None of that changes what you owe. Every dollar of interest, taxable and tax-exempt alike, belongs on the return whether or not a form ever turns up. The 1099-INT and 1099-DIV walks through the boxes.

Certificates of deposit, and the penalty you can deduct

A certificate of deposit is a debt instrument, which is why a CD running longer than a year does not wait for maturity. Part of the total interest due belongs in income each year, reported the way original issue discount is.

Break a CD early and the bank may charge a penalty. Your form shows the whole year's interest in one box and the penalty separately in another, and the two do not cancel out. All the interest goes into income, and the penalty comes off separately as an adjustment on Schedule 1.

Savings bonds: you choose which year

There are two methods and you pick one. The first holds the interest back until whichever comes first: the year you cash or otherwise dispose of the bond, or the year it matures. The second reports the annual rise in redemption value as it happens. Whichever you choose applies to every Series EE and Series I bond you hold, and doing nothing chooses the first.

Switching costs something in each direction. Moving from postponing to yearly reporting needs nobody's permission, but in the year you switch you report all the interest accrued so far on every bond you own. Moving back the other way requires permission from the IRS; the publications point at Form 3115 as the route, without going further here.

Most people postpone. The classic case for the other choice is a bond in a child's name, where the interest may be taxed at a lower rate now than years later.

What states can and cannot tax

Interest on Treasury bills, notes and bonds is federally taxable but exempt from every state and local income tax, and it gets its own box on the form. Savings bond interest is treated the same way by the states, though federal estate, gift and excise taxes still reach it, as do state estate and inheritance taxes.

Texas has no state income tax, so a Texan gains nothing extra from that exemption. It matters if you file a return in another state, if you moved partway through the year, or if you may move later. Moving to Texas and the last state return covers the year the move happens.

Education spending can wipe out savings bond interest

This is worth real money to a small number of readers, and it fails on any single condition. The exclusion runs on Form 8815, and all of the following have to be true. The bonds are Series EE or I issued after 1989. You had turned twenty-four before they were issued, which is why a bond registered to a child never qualifies, however old the child later is. They are registered in your name, or in yours and your spouse's. You cash them in the same year you claim the exclusion. You paid qualified higher education expenses in that same year to an institution that is eligible. Those expenses were for you, your spouse, or someone you claim as a dependent. You file under any status other than married filing separately. And your modified adjusted gross income comes in under the year's cut-off.

That cut-off is a range rather than a cliff. The exclusion starts shrinking once modified adjusted gross income passes the lower amount for your filing status and is gone entirely at the upper one, with a higher pair on a joint return.

What counts as a qualified expense is narrower than a college bill. Tuition and the fees required to enroll or attend qualify, as do contributions to a Coverdell education savings account or a qualified tuition program for the same person. Room and board are out. So are courses in sports, games or hobbies, unless they are part of a program granting a degree or a certificate. Expenses covered by nontaxable educational benefits come off the list, and so do any used to figure an education credit or the untaxed part of a Coverdell or qualified tuition program distribution: the same expense cannot do two jobs. Education credits covers the other claim on those same dollars. The excluded amount is figured on Form 8815 and carried to Schedule B.

What to do with all of this in January

Gather every 1099-INT, composite broker statements included, and check whether any CD was broken during the year. Decide the savings bond question before you cash anything rather than afterwards. And remember that a year with unusually large interest can leave you underpaid; quarterly estimates is where that gets fixed.