The Boring Newsletter, 7/16/2023

Anatomy of a 1040, Class 5

Hi Friendos,

Today’s summer school class is a short one!

Last week we talked about W-2 income that gets reported on line 1 of Form 1040. This week we’re going to line 2 and covering interest income. (Don’t worry, we’re not going to do one line per week the rest of the summer!)

If you have a high-yield savings account or an interest-bearing checking account, you earn interest income. If you have a CD (certificate of deposit), you earn interest income. If you own U.S. savings bonds or I bonds, you earn interest income. If you own bonds directly (as in, not via a mutual fund), you receive interest payments on them and will have interest income.

Interest income can be subject to federal income taxes and state income taxes (like interest from a high-yield savings account), subject to federal income taxes but not state income taxes (like I bonds), or subject to state income taxes but not federal income taxes (like most municipal bonds – bonds issued by a state or local government). It is because interest income could be taxable for federal taxes, or not (tax-exempt), we have the two different boxes on line 2.

If you examine your federal tax return and see some income amounts are a little different from what’s on your state income tax return, maybe it’s due to differing tax treatment of interest income.

If a company sends you a 1099-INT in the mail, it is because they paid you more than $10 of interest income during the year. So if you got $11 in interest from your bank during the year (a little less than $1 per month), you have to pay tax on it in the same way that you have to pay tax on a paycheck from a regular job. Technically even if you only got $1 of interest you have to pay tax on it, even though the bank that paid you the dollar would not send a 1099-INT, due to $1 being below the $10 reporting threshold.

So if you prepare your own taxes (like using tax software) you should make sure that you enter all the info from 1099-INT forms into the program so it will calculate things accurately (same for all 1099 forms you receive). If you have someone else prepare your taxes, make sure they get copies of all the 1099s you received for that year. If you omit these when you figure your taxes, you might underpay by accident (I know you would never try to cheat).

Class dismissed!

-Stephanie