Interest is considered a source of unearned income. There is no minimum threshold amount when it comes declaring interest earnings. The IRS requires you to report interest earned on bank accounts when you prepare your taxes, no matter how small the amount. Every penny counts to the IRS. However, there are certain accounts that are designed to offer tax-deferred advantages.
Your bank or investment firm issues you a 1099-INT form for every account that earned interest during the year. The bank also submits a copy of the form to the IRS. If you have an account that earned interest and you didn't receive a 1099, contact the bank before you file taxes. If you don't report the earnings, you face a penalty and interest along with the amount you owe. Failing to report income may raise red flags. The IRS might suspect tax fraud as opposed to an innocent mistake, which can trigger an audit.
If you have a tax-deferred account, such as an individual retirement account, 401(k) or a deferred annuity, you don't need to report the interest earnings until you begin taking withdrawals. You never have to report Roth IRA earnings because this type of IRA is funded using money that has already been taxed.
Certificate of Deposit
With a certificate of deposit, referred to as a CD, you are required to report the earnings even if you aren't receiving the money yet. With most CDs, interest compounds inside the account until the maturity date. However, an IRA CD is the exception. If you have an IRA CD, you do not need to report the interest earnings for the year. Since an IRA is tax-deferred, you don't claim the earnings until you begin receiving distributions when you retire.
Reporting the Interest
If you earn $1,500 or less in interest, report the earnings on the front side of your Form 1040A or your Form 1040EZ. For interest earnings that exceed $1,500, you must file a Schedule B with your return. Filing a Schedule B makes you ineligible to use a Form 1040EZ.
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