Form 1099-INT Basics

The IRS Form 1099-INT (Interest Income) is used by banks, financial institutions, and other entities to report interest income paid to their customers during the tax year.

In general, if the account holder receives $10 or more in interest income, the payor must file Form 1099-INT and provide the recipient with a copy.

Sample Video Tutorial for Early Withdrawal Penalties

The topic covered in this video tutorial and blog post covers Form 1099-INT, where a taxpayer received interest income and had early withdrawal penalties imposed because of the early withdrawal of savings from a certificate of deposit account.

The bank reports the early withdrawal penalty in Box 2 of Form 1099-INT. The bank must still report the gross interest income amount in Box 1; however, it also deducts the early withdrawal penalty from the balance before allowing the customer to withdraw the full amount of the proceeds.

The customer reports the gross interest income on Schedule B (Interest & Dividends) and separately reports the early withdrawal penalty as a deduction on Schedule 1 (Additional Income & Adjustments).

Example Fact Pattern

In this example, the taxpayer invested $8,000 into a 12-month CD with a local bank. The CD pays 4.5% interest income (totaling $360) if held to maturity. Under the terms of the CD, the taxpayer must keep their money with the bank until maturity before withdrawing any funds. If the taxpayer withdraws funds before maturity, the bank will assess an early withdrawal penalty.

The taxpayer requested to withdraw the CD early when the CD had accrued $238 of interest income. The bank assessed an early withdrawal penalty of $88. The taxpayer received a Form 1099-INT that reported $238 of interest income in Box 1 and a $88 early withdrawal penalty in Box 2.

The taxpayer reported the $238 of interest income on his Schedule B and the early withdrawal penalty of $88 on Line 18 of Schedule 1 Part II.

Key Elements on Form 1099-INT for 2023

Box 1: Interest Income: The gross taxable interest income received during the calendar year.

Box 2: Early Withdrawal Penalty: Penalties charged to the account holder for the early withdrawal of certain types of savings accounts, such as certificates of deposit.

Box 3: Interest on U.S. Savings Bonds and Treasury Obligations: Taxable interest from U.S. Treasury bonds, bills, notes, and savings bonds. Federal interest income is subject to federal income taxes; however, it is generally exempt from state income taxes.

Box 4: Federal Income Tax Withheld: Any federal income tax withheld under the backup withholding rules under IRC Section 3406.

Box 6: Foreign Taxes Paid: If the amount of interest income includes any foreign source interest income that was subject to foreign withholding taxes, the foreign tax withheld is generally passed to the account holder and can be used as a foreign tax credit (FTC). FTC for individuals is reported on Form 1116 (Foreign Tax Credit).

Box 8: Tax-Exempt Interest: Interest income that is exempt from federal income tax, such as municipal bond interest income. Although the interest may be exempt from federal income taxes, it may be subject to state income taxes, depending upon your residency.

Box 9: Specified Private Activity Bonds Interest: The amount in Box 9 represents the portion of tax-exempt interest income that is private activity bond (PAB) interest income. PAB interest income is subject to special tax rules for alternative minimum tax (AMT) purposes.

Box 11: Bond Premium: The bond premium amortization on tax-exempt bonds.

Box 15: State: The state abbreviation in Box 15 indicates which state issued the municipal bonds reported in Box 8. This information is important for residents of states that impose income taxes.

Other Helpful Resources

Additional Information on Interest Income

Taxpayers can find more information on 1099-INT by visiting the form instructions and IRS Publication 550 (Investment Income and Expenses).