Student Income Tax Guide: Investment Income
This section explains whether you have to report income from bank accounts and certain other investments. Various types of investment income are treated differently. Some of the more common ones are discussed here.
Interest
Interest you get from checking and savings accounts and most other sources is taxable.
Bank accounts
Some credit unions, building and loan associations, savings and loan associations, mutual savings banks, and cooperative banks call what they pay you on your deposits "dividends." However, for tax purposes, these payments are considered interest, and you should report them as interest.
U.S. Savings Bonds
Interest on U.S. savings bonds is taxable for federal income tax purposes, but exempt from all state and local income taxes. The most common bonds are series EE and series I bonds. Series EE bonds are issued in several different denominations and cost one-half the amount shown on the face of the bond. For example, a $100 bond costs $50. The face value of the bond is paid only when the bond matures. The difference between what you paid for the bond and the amount you get when you cash it is taxable interest.
Series I bonds are inflation-indexed bonds issued at their face value. The face value plus accrued interest is payable to you at maturity.
You can report all interest on these bonds when you cash them, or you can choose to report their increase in value as interest each year. Publication 550, Investment Income and Expenses, explains how to make this choice.
Under certain circumstances, the interest on U.S. savings bonds (series EE and series I) issued after December 31, 1989, is exempt from tax if the bonds are used for educational purposes. See Publication 550 for further information.
Other Interest from the U.S. Government
Interest on U.S. Treasury bills, notes, and bonds is taxable for federal income tax purposes. This interest is exempt from all state and local income taxes.
Tax-Exempt Bonds
Generally, interest from bonds issued by state and local governments is not taxable for federal income tax purposes.
Interest Statements
Your bank, savings and loan, or other payer of interest will send you a statement if you earned at least $10 in interest for the year. You should receive these statements sometime in January for the previous tax year. Banks may use Form 1099-INT, Interest Income. However, they may include your total interest on the statement they send you at the end of the year. Do not throw these statements away.
Dividends
Dividends are distributions of money, stock, or other property paid to you by a corporation. You may also get dividends through a partnership, an estate, a trust, or an association that is taxed as a corporation. Ordinary dividends, the most common type, are paid out of the corporation's earnings. You must report these as income on your tax return.
Dividend Statements
Regardless of whether you receive your dividends in cash or additional shares of stock, the payer of the dividends will send you a Form 1099-DIV, Dividends and Distributions, if you earned at least $10 in dividends for the year.
Other Investment Income
If you received income from investments not discussed here, see Publication 550 . Also, the payer of the income may be able to tell you whether the income is taxable or nontaxable.