Interest

Interest — from savings accounts, CDs, Treasuries, and corporate bonds — is ordinary income taxed at your marginal rate, 10% to 37% federally, with the 3.8% NIIT on top above the threshold. There is no preferential rate and no holding-period test, which is the whole reason taxable bonds belong behind a deferral wrapper and qualified-dividend equities do not (section “Assigning Assets into Tax Buckets”). The one exemption that matters is by issuer: Treasury interest is free of state and local tax, and municipal interest is free of federal tax, covered below.

Reporting Interest Income

You must report all your taxable interest income on your federal income tax return. Typically, you will receive a Form 1099-INT from each payer who has paid you $10 or more in interest during the year. This form details the amount of interest you’ve received, making it easier to report accurately.

Tax-Exempt Interest

Not all interest income is subject to federal income tax. Interest from certain types of investments, such as municipal bonds, is generally exempt from federal taxes. If you invest in bonds issued by the state or local government within your state of residence, you may also be exempt from state and local taxes. This tax-exempt status makes municipal bonds particularly attractive to investors in higher tax brackets, providing a tax-efficient source of income.