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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.
You should really make sure that you always have access to monthly records of your income from interest or dividends.
Why monthly and not just year-end? Well, suppose you move to another state -- even if you don't think you will. If you live in two states during one calendar year, you have to file tax returns for both states.
And guess what? They will want to know how much interest income you earned while living in that state! So if you move in, say, September, you will need to know how much interest income you earned up until September and how much you earned from October through the end of the year. You don't necessarily need to keep paper records, though -- if you receive electronic statements, your financial institution will have those available online.
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