What is Interest Income ?
Interest income is income received from the lending of money.
An investor who owns a bond or a certificate of deposit (CD) or who lends money to a bank, corporation, or government entity will receive interest in return for the use of the funds.
Interest income is taxed as ordinary income at the taxpayer’s marginal tax rate.
Interest income for businesses can be complicated, depending on what the business does. For example, if you buy a bond and then sell it, you have to consider capital gains taxes. On the other hand, if you just own a bond that pays interest but never sells it, there’s no capital gains tax because there was no gain (or loss).
Interest Income Example
Interest income is the money you earn by depositing your funds in interest-bearing accounts, such as savings accounts and certificates of deposit (CDs). It also includes income earned on bonds and Treasury bills.
For example, if you put $10,000 in a 1-year CD that earns 2%, then you will earn $200 in interest income over the course of the year.
Taxable and Non-Taxable Interest Income
Interest income can be taxable or non-taxable, depending on the source of the income and the type of investment being made. Interest earned from municipal bonds (munis) is exempt from federal taxes and, in some cases, state and local taxes as well.
Whether or not interest is taxable depends on several factors. When you open a savings account, ask your financial institution if the interest paid on the account is taxable or not.
If it’s not, you can simply include this amount in your gross income when you file your tax return. However, if it is taxable, you must report it as income on your tax return. You may receive Form 1099-INT from the financial institution where you earned the interest—this form shows how much interest you earned during the year.