Putting your money in interest-bearing account lets you make money even when you're on vacation. However, unless you're investing in tax-free accounts, like municipal bonds, you're going to have to report it on your income taxes and share some of the proceeds with your needy Uncle Sam.
No matter how much interest you earn during the year, you have to report it on your tax return. The IRS considers all of your interest income as taxable income, so you need to report any amount. For example, if you receive $5 of interest on a loan you made to your friends, you need to include that on your tax return. On Form 1040EZ, the interest goes on line 2. On Form 1040A or Form 1040, it goes on line 8a.
Just because any amount of interest is taxable doesn't mean your bank has to send you a 1099-INT. Instead, the IRS only forces your bank to mail you a form if your taxable interest from any one source exceeds $10. For example, if you earn $9 in interest on your savings account, you typically won't receive a Form 1099-INT from the bank. But, you're still responsible for reporting it on your taxes.
Tax Filing Minimums
The only way you don't have to report your interest on your tax return is if you don't have to file a tax return in the first place. When figuring out if you have to file, calculate your total income, including your taxable interest income, and compare it to the filing thresholds for your filing status and age -- which change annually. For example, as of the 2012 tax year, you have to file a return if you're single and under 65 if your income exceeds $9,750. But, if someone else claims you as a dependent, you have to file if your unearned income ,including interest income, exceeds $950; your earned income exceeds $5,950; or your total income exceeds the larger of $950 or your earned income plus $300.
Schedule B Minimums
Depending on how much interest interest you earned during the year, you might have to fill out Schedule B -- and therefore have to use Form 1040A or Form 1040 -- to report your interest. As of the 2012 tax year, you're required to list each source of interest income on Schedule B if your total interest income exceeds $1,500. When you're counting your total interest for the $1,500 threshold, don't include any nontaxable interest.
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