Learn about earning interest income from savings accounts and funds – and how it's taxed and reported.

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Points to know

  • Interest is taxed at your usual income tax rate.
  • "Interest dividends" from funds are taxed like regular interest.

What's interest?

Even if you're new to investing, you're probably familiar with interest income. It's paid by many bank products like savings accounts and CDs (certificates of deposit). It's also paid by bonds and money market products.

If you own bonds or money markets through a mutual fund or ETF (exchange-traded fund), the interest payments will go to the fund and will then be passed on to you as "interest dividends" (which are treated as interest for tax purposes).

Some bonds issued by government entities have special tax treatment.

Get information on the tax treatment of government & municipal bonds

Interest

The amount or rate charged when money is borrowed. For example, when you invest in bonds, you receive interest payments from the bond's issuer.

Certificate of Deposit (CD)

An insured, interest-bearing deposit at a bank that requires the depositor to keep the money invested for a specific period of time. CDs can be traded on the secondary market.

Mutual fund

A type of investment that pools shareholder money and invests it in a variety of securities. Each investor owns shares of the fund and can buy or sell these shares at any time. Mutual funds are typically more diversified, low-cost, and convenient than investing in individual securities, and they're professionally managed.

ETF (exchange-traded fund)

An investment with characteristics of both mutual funds and individual stocks. Many ETFs track an index, a commodity, or a basket of assets. Unlike mutual funds, ETFs can be traded throughout the day. ETFs often have lower expense ratios but must be purchased and sold through a broker, which means you may incur commissions.

What's the tax rate on interest?

Interest income is taxed at your usual income tax rate.

How is interest reported?

Interest on individual securities is reported to you and to the IRS on Form 1099-INT. Interest paid by funds is reported on Form 1099-DIV.

See more about tax forms

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