Forms for Interest Income

• If you make less than $1,500 in interest income, you can file your tax return with a Form 1040EZ, Form 1040A or Form 1040. If you make more than $1,500 from your interest income cannot use Form 1040EZ and you must file a Schedule B. You also must file a Schedule B if you sold your house to a buyer who used it as their personal reside and provided seller financing, purchases an investment that had accrued but unpaid interest when you bought it, had tax-free interest or received foreign interest. The Schedule B details what your sources of interest were and how much you received from each of them.
  
  

Accrued Interest

• Taxes are charged on interest that is paid as well as interest that has accrued on your investments. For example, if you invested in a certificate of deposit half way through the year that pays interest annually, even though you haven't seen any of the interest deposited in your account you are still responsible for paying taxes on it. To determine how much interest has accrued, use the following formula where P is the principal, R is the annual interest rate and D is the number of days since the last interest payment:
  Accrued Interest = P * R * D / 365
  For example, if you had $10,000 invested in a CD that paid 4 percent per year and it had been 60 days since interest had been paid, $65.75 would have accrued.
  
  

Tax Deferred and Tax Free Interest

• Some investments offer tax deferred or tax free interest. Series EE savings bonds offered by the federal government give investors the option to defer any tax payments on the interest until the bond matures or is redeemed. Municipal bonds, which are bonds offered by state or local governments, are free from federal taxes. Though states have the power to tax the interest on these bonds, most do not because they want their bonds to be more attractive to investors.