Well-thought-out investments can lead to interest. That’s the potential upside of an investment. But with that potential upside comes a responsibility. Specifically, any investment income above $10 requires the payer to issue a Form 1099-INT to the investor. Payers can include banks, other financial institutions, brokerage institutions, mutual funds, or any other entity that pays interest to a taxpayer.
According to the IRS, payers need to issue this form for the above-mentioned interest payments of $10 and above. Investors also receive this form if the payer:
- Withholds and pays any foreign tax on interest
- Withholds (and didn’t refund) federal income tax under backup withholding rules, no matter the payment amount
The 1099-INT is also issued if a taxpayer is penalized for early withdrawal from a time-based savings account (think Certificate of Deposit) or retirement account.
Taxpayers should receive their Form(s) 1099-INT for interest earned the previous year by January 31; one form is sent for each interest-bearing account (as long as the interest is higher than $10). But failure to receive the form doesn’t mean the taxpayer isn’t off the hook for reporting (and paying taxes on) that interest income.
The bank, brokerage, or mutual fund likely has reported that income to the IRS. A taxpayer failing to to report interest on the “taxable interest” line of a tax return could receive a letter from the IRS outlining that failure to report, and a potential interest penalty as well.
But is it necessary to attach a copy of each and every Form 1099-INT to a Form 1040? No. The IRS wants to be sure that what the taxpayer reports in interest matches what the payer reported. Any deviation could (once again) lead to fines or penalties.
The takeaway here for taxpayers it to keep track of interest payments. Even a seemingly minuscule interest payment of $15 or $20 must be reported. Taxpayers that haven’t received Form 1040-INT should contact the payer issuing it. And for additional information about taxes owed on interest payments, it’s always a good idea to work with a professional tax advisor.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice, meeting the particular investment needs of any investor.
Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.