Chapter 6 of IRS Publication 17 explains which interest is taxable, when it counts and where it goes on Form 1040. It touches Form 1040 lines 2a and 2b, Schedule B Part I, and Forms 1099-INT, 1099-OID and 8815. In the 2025 edition it fills printed pages 54 to 61; the 2023 and 2024 editions carry the same chapter on pages 54 to 62. It follows chapter 5 on wages and leads into chapter 7 on Social Security benefits. These are unofficial study notes in our own words; the IRS publication controls.
Key terms
| Term | Meaning |
|---|---|
| Constructive receipt | Income counts once credited and available, even if left in the account |
| OID | The gap between a debt's issue price and its redemption price, taxed over the term |
| De minimis OID | A discount small enough to be treated as zero |
| Backup withholding | A flat 24% the payer keeps when your TIN is missing or wrong |
| Modified AGI | AGI before the bond exclusion, with certain items added back; used for the Form 8815 limit |
What counts as taxable interest
- Default rule. Interest is taxed when paid or credited and you are free to withdraw it. Partnerships, S corporations, estates and trusts report your share on a Schedule K-1.
- Bank-type "dividends". Payouts called dividends on deposits at credit unions, savings and loans and mutual savings banks are interest. Money market fund payouts are generally dividends.
- Certificates of deposit (CDs). Interest paid at intervals of a year or less (or at the end of a term of a year or less) is taxed when you can take it without a substantial penalty. Longer terms follow the OID rules.
- Early-withdrawal penalty. Report all interest credited, then deduct the penalty separately. Form 1099-INT box 2 shows it.
- Account-opening gifts. A non-cash gift is interest when its cost to the bank exceeds $10 (deposit under $5,000) or $20 (deposit of $5,000 or more).
- Other taxable items. Interest on tax refunds, condemnation awards and deferred payments for property you sold.
- Bonds between interest dates. Accrued interest inside a sale price is the seller's interest; a buyer who later receives it treats it as a return of capital.
- Frozen deposits. Exclude interest you cannot withdraw at year-end because the institution is failing or the state froze withdrawals: interest credited minus (net amount withdrawn plus amount you could have withdrawn). It is income once you can withdraw it.
Exempt interest and Treasury interest
- Government bonds. Interest on bonds funding ordinary operations of a state, the District of Columbia, a territory or a subdivision is generally exempt; tribal bonds qualify under added conditions. Some private activity bond interest is an alternative minimum tax item. A fund's exempt-interest dividends (Form 1099-DIV box 12) are likewise untaxed but reportable.
- Line 2a is information only. It never becomes taxable, yet other tests use it, such as the Social Security test in chapter 7. Never put IRA interest there.
- Treasury securities. Bills run 4, 8, 13, 26 or 52 weeks and are sold at a discount, reported when the bill matures. Notes run over one year up to 10, bonds longer. Form 1099-INT box 3 shows the amount.
- Foreign interest. A U.S. citizen reports it unless U.S. law exempts it, whether or not the foreign payer sends a Form 1099. See NRE, NRO and FCNR accounts and FBAR for Indian bank accounts.
U.S. savings bonds
- Timing. Series EE and Series I bonds pay everything at redemption. Cash-method holders choose method 1 (postpone to the earlier of cashing or final maturity) or method 2 (report each year's rise in redemption value), for all EE and I bonds alike. Moving from 1 to 2 needs no permission, but all interest accrued to date is reported that year. Moving back follows an IRS procedure (the 2025 edition cites Rev. Proc. 2025-23, section 17). Accrual-method taxpayers report yearly.
- Whose income. The person whose money bought the bond; co-payers split by what each paid; community property spouses each report half. If you alone paid and the bond is reissued to someone else, you report the interest earned so far.
- A Form 1099-INT can overstate. It may include interest you reported earlier, inherited or received by transfer. On Schedule B list the full amount, subtotal it, then subtract a line labelled "U.S. Savings Bond Interest Previously Reported".
- Education exclusion (Form 8815). Not available to married filing separately. The bond must be a Series EE issued after 1989 or a Series I, in your name or yours and your spouse's, and the owner must be 24 or older before the issue date. Qualified costs are tuition and fees for you, your spouse or a dependent (not room and board), reduced by tax-free aid and expenses used for education credits. Exclusion = interest x (qualified costs paid that year / total proceeds), capped at all the interest, then limited by the income table below.
Original issue discount
- OID is the stated redemption price at maturity minus the issue price, taxed as it accrues, paid or not.
- De minimis test. The discount is zero when it is less than 0.25% x redemption price x full years to maturity.
- No OID accrual for: tax-exempt bonds, savings bonds, debts of a year or less, personal loans between individuals totalling $10,000 or less (outside a business, no tax-avoidance purpose) and debts bought at a premium.
- Form 1099-OID boxes: 1 OID for the year, 2 other periodic interest, 8 OID on Treasury obligations, 11 tax-exempt OID. Without a form, compute OID with Pub. 1212. A CD longer than one year is taxed the same way.
When to report, and how
- Cash method (most people): when received or constructively received; a notice requirement or a withdrawal penalty does not delay it unless early-withdrawal interest is far below interest at maturity. Accrual method: as earned.
- Schedule B Part I is required when: (1) taxable interest exceeds $1,500; (2) you claim the Form 8815 exclusion; (3) you received seller-financed mortgage interest and the buyer uses the property as a home; (4) a 1099-INT includes savings bond interest reported earlier; (5) you are a nominee; (6) a 1099-INT shows frozen-deposit interest; (7) you bought a bond between interest dates; (8) you report less OID than Form 1099-OID shows; (9) you reduce bond interest by amortizable premium.
- Ask the payer for a missing Form 1099-INT after February 15; the interest is taxable anyway.
By tax year: 2023, 2024, 2025 and 2026
Form 8815 income limits (modified AGI)
| Item | 2023 | 2024 | 2025 | 2026 planning |
|---|---|---|---|---|
| Joint: reduction starts above | $137,800 | $145,200 | $149,250 | $152,650 |
| Joint: no exclusion at or above | $167,800 | $175,200 | $179,250 | $182,650 |
| Other statuses: starts above | $91,850 | $96,800 | $99,500 | $101,800 |
| Other statuses: none at or above | $106,850 | $111,800 | $114,500 | $116,800 |
2026 column: planning figures from Rev. Proc. 2025-32 and the 2025 law; Pub 17 (2026) is not yet published.
Unchanged in the 2023 to 2025 editions: the $1,500 Schedule B threshold, 24% backup withholding, the $10 and $20 gift limits, owner age 24 and the 0.25% OID test. We found no 2026 change in the sources read.
Rule changes by edition
- 2023: prints the Form 8815 limits (pages 59 and 60) and mentions Form 8818. Method 2 to 1 uses an attached statement. Form 1099-OID is described as sent when OID reaches $10.
- 2024: drops the limits and Form 8818 from the text; notes the last HH bonds stop earning interest in 2024.
- 2025: replaces "savings bonds traded" with reasons a Form 1099-INT may overstate bond interest, cites Rev. Proc. 2025-23 for method 2 to 1 and adds a second education example.
Worked examples
Example 1 (tax year 2025). Meera has $1,100 of savings interest and $900 of CD interest (Form 1099-INT box 1), $600 of Treasury bill interest (box 3) and $2,000 of municipal interest (box 8). Taxable interest is $1,100 + $900 + $600 = $2,600 on line 2b; $2,000 goes on line 2a. Because $2,600 exceeds $1,500, she files Schedule B Part I.
Example 2 (tax year 2024). A couple filing jointly cashes qualifying Series EE bonds for $8,000: $5,000 principal and $3,000 interest. They paid $6,000 of qualifying tuition (no credit or aid used on it) and have modified AGI of $120,000, below the $145,200 joint start. Exclusion = $3,000 x ($6,000 / $8,000) = $2,250. The other $750 is taxable, and Schedule B is required.
Example 3 (tax year 2023). An 8-year bond with a $5,000 redemption price is issued at $4,950. OID is $50; the test amount is 0.0025 x $5,000 x 8 = $100. Fifty is less than $100, so the OID is zero. Issued at $4,900, the OID of $100 equals the test amount, is not less than it, and must be accrued.
Common mistakes and exam traps
- Netting the early-withdrawal penalty against interest instead of deducting it separately.
- Treating Treasury interest as federally exempt, or leaving municipal interest off line 2a.
- Calling a money market payout interest, or a credit union's share "dividend" a dividend.
- Forgetting the Schedule B adjustment when a bond's Form 1099-INT includes interest already reported.
- Claiming Form 8815 as married filing separately or for a bond bought before the owner turned 24.
- Assuming no Form 1099-INT means no income.
Forms and lines map
| Form and line (2025 form) | What goes there |
|---|---|
| Form 1040 line 2b | Total taxable interest |
| Form 1040 line 2a | Total tax-exempt interest |
| Form 1040 line 25b | Backup withholding (1099-INT box 4) |
| Schedule B Part I, lines 1 to 4 | Payers, total, Form 8815 exclusion (line 3), net (line 4) |
| Schedule B Part III | Foreign account questions, required above $1,500 of interest or dividends |
| Form 1099-INT (January 2024 revision) | Box 1 interest, 2 penalty, 3 bonds and Treasuries, 6 foreign tax, 8 tax-exempt, 9 AMT part |
| Forms 8815, 8615, 8814 | Education exclusion; child's unearned income; parent's election |
The 2026 draft Form 1040 and Schedule B keep these line numbers.
Check yourself
Is Treasury note interest taxable in 2025?
Answer: Federally yes. For state and local income tax, no, because it is a federal obligation.
In 2025 you have exactly $1,500 of taxable interest and no other trigger. Is Schedule B required?
Answer: No. The trigger is more than $1,500.
In 2024, EE bond proceeds are $10,000 (interest $4,000) and qualified costs are $2,500, below the income limit. What is excluded?
Answer: $1,000, which is $4,000 x ($2,500 / $10,000).
In 2023 a 10-year bond with a $1,000 redemption price is issued at $975. Is the OID counted?
Answer: Yes. The test amount is 0.0025 x $1,000 x 10 = $25, and $25 is not less than $25.
In 2025 a bank credited $300 to a frozen deposit, you withdrew $250 and could withdraw nothing more at year-end. How much is taxable this year?
Answer: $250. The $50 you could not withdraw is excluded until you can withdraw it.
In 2024 you deposit $4,000 and receive a gift that cost the bank $12. Interest?
Answer: Yes, $12, since the deposit is under $5,000 and the gift costs over $10.
In 2025 a five-year CD pays all interest at maturity. When is it taxed?
Answer: Partly each year as OID, because the term exceeds one year.
Which line of the 2025 Form 1040 takes tax-exempt interest?
Answer: Line 2a, for information only.
Frequently asked questions
Do I report interest if I never received a Form 1099-INT?
Yes. All taxable interest is reportable. Contact the payer if nothing arrives by mid-February, and keep a list of interest sources.
Is a child's interest reported on the parent's return?
Sometimes. Part of a child's unearned income may be taxed at the parent's rate on Form 8615, and some parents may include it using Form 8814. Check that year's instructions.
Why is the interest on my savings bond Form 1099-INT too high?
It can show all interest since issue, including amounts already reported. Use the Schedule B adjustment line described above. Large interest with no withholding may also call for estimated tax.
A CPA can review your Forms 1099 and your return to make sure each interest item lands on the right line.
Official sources
- IRS Publication 17 (2025), chapter 6
- IRS Publication 17 (2024), chapter 6
- IRS Publication 17 (2023), chapter 6
- IRS Rev. Proc. 2022-38 (2023 amounts), section 3.18
- IRS Rev. Proc. 2023-34 (2024 amounts), section 3.18
- IRS Rev. Proc. 2024-40 (2025 amounts), section 2.18
- IRS Rev. Proc. 2025-32 (2026 amounts), section 4.17
This page is a plain-language summary. The official source controls if there is any difference.
General information only, not tax, legal or accounting advice for your situation. Rules, limits and deadlines change; confirm the current rules with the official source or a qualified professional before you act. Reading this page does not create a professional relationship with CPA Tax Payroll and Accounting Corp.