Interest you earned during the year goes on Form 1040 in two places: taxable interest on Line 2b, and tax-exempt interest (mainly municipal bond earnings) on Line 2a. If your taxable interest totals more than $1,500, you list each payer on Schedule B first and carry the total across.1Internal Revenue Service. About Schedule B (Form 1040) Every dollar of interest is reportable, whether or not a 1099 arrives in the mail.2Internal Revenue Service. Topic No. 403, Interest Received
Which Line on Form 1040
Line 2b holds taxable interest. This is where bank savings, CDs, money market accounts, corporate bonds, Treasury interest, seller-financed mortgage interest you received, and any interest the IRS paid you on a delayed refund all land.2Internal Revenue Service. Topic No. 403, Interest Received It’s taxed as ordinary income at the same rate as your wages.
Line 2a holds tax-exempt interest, primarily interest on state and local government bonds, which Section 103 of the Internal Revenue Code excludes from federal gross income.3Office of the Law Revision Counsel. 26 U.S. Code 103 – Interest on State and Local Bonds Reporting it doesn’t raise your tax; the IRS uses the figure informationally and for certain modified-AGI calculations.4Internal Revenue Service. Instructions for Form 1040
Treasury interest is a special case within the taxable bucket. It’s federally taxable and belongs on Line 2b, but it’s exempt from state and local income tax, which is why your 1099-INT breaks it out separately so you can subtract it on your state return.5TreasuryDirect. Tax Information for EE and I Bonds
When You Need Schedule B
You have to file Schedule B along with your 1040 if any of these are true:1Internal Revenue Service. About Schedule B (Form 1040)
- Your taxable interest is more than $1,500.
- You received seller-financed mortgage interest from a buyer who used the property as a personal residence.
- You received interest as a nominee for someone else.
- You need to adjust the OID amount shown on a 1099-OID.
If none of those apply and your taxable interest is $1,500 or less, skip Schedule B and put the total straight on Line 2b.
Reading Your 1099-INT
Payers must send Form 1099-INT when they’ve paid you $10 or more in interest for the year.6Internal Revenue Service. About Form 1099-INT These are the boxes that drive your entries:
- Box 1 is the general taxable interest figure that feeds Line 2b (or Schedule B Line 1).
- Box 2 shows any early withdrawal penalty; this is deducted separately (see below), not on Schedule B.
- Box 3 is interest from U.S. Savings Bonds and Treasury obligations. Federally taxable, so include it on Schedule B or Line 2b, but note it for your state return where it’s exempt.
- Box 8 is tax-exempt interest, such as municipal bond earnings, which goes on Line 2a.
- Box 9 flags interest from specified private activity bonds. It’s tax-exempt for regular tax but may trigger the Alternative Minimum Tax.
A common miss: interest under $10 doesn’t generate a 1099-INT, but you still owe tax on it. Check December statements for small amounts that fell below the threshold.7Internal Revenue Service. Publication 550 – Investment Income and Expenses
If You Also Received a 1099-OID
Bonds issued below face value carry original issue discount, which is essentially interest that accrues over the bond’s life. You must include a portion in income each year even though the cash doesn’t arrive until maturity or sale.8GovInfo. 26 U.S. Code 1272 – Current Inclusion in Income of Original Issue Discount Your broker reports the year’s amount on Form 1099-OID.9Internal Revenue Service. About Form 1099-OID, Original Issue Discount Add that figure to your interest list on Schedule B alongside your 1099-INT amounts.
Filling Out Schedule B, Part I
Part I is a simple list. On Line 1, write each payer’s name and the interest amount received from them. Pull the figures from Box 1 of each 1099-INT, plus Box 3 (Treasury), plus any 1099-OID amounts. If you earned interest that wasn’t reported on any 1099, list the payer and amount anyway.7Internal Revenue Service. Publication 550 – Investment Income and Expenses
Line 2 is the total of everything on Line 1. Line 3 is for the education savings bond exclusion, if you’re claiming it on Form 8815. Line 4 subtracts Line 3 from Line 2, and that result goes to Line 2b of Form 1040.10Internal Revenue Service. Schedule B (Form 1040)
Tax-exempt interest from Box 8 of your 1099-INTs never touches Schedule B. Add those amounts up separately and put the total on Line 2a of Form 1040.4Internal Revenue Service. Instructions for Form 1040
Adjustments You Make on Schedule B
Nominee Interest
Sometimes a 1099-INT arrives in your name for interest that partly belongs to someone else, like a joint account where the co-owner has their own share. List the full amount on Line 1 as reported. Below the subtotal of your Line 1 entries, write “Nominee Distribution” and subtract the portion that isn’t yours. The reduced figure carries to Line 2.11Internal Revenue Service. Instructions for Schedule B (Form 1040) You’ll also need to issue a 1099-INT to the actual owner so they can report their share.
Accrued Interest on a Bond You Bought
Buy a bond between coupon dates and you pay the seller for interest that built up before you owned it. The next interest payment, and the 1099-INT that follows, will include that pre-purchase slice. Report the full 1099 amount, then subtract the accrued interest you paid the seller below the subtotal, labeled “Accrued Interest.”11Internal Revenue Service. Instructions for Schedule B (Form 1040)
Early Withdrawal Penalty Goes Elsewhere
If you broke a CD early and your bank kept part of the interest as a penalty, that amount shows up in Box 2 of the 1099-INT. Don’t net it against your interest on Schedule B. Enter it on Line 18 of Schedule 1 (Form 1040), where it reduces your adjusted gross income directly.12Internal Revenue Service. Schedule 1 (Form 1040) – Additional Income and Adjustments to Income The deduction is available even if the penalty exceeds the year’s interest, and you don’t need to itemize.
If You Leave Interest Off Your Return
The IRS gets copies of every 1099-INT and 1099-OID your payers file, and its Automated Underreporter program matches them to what you reported. Mismatches generate CP2000 notices, typically 12 to 18 months later.
The IRS can assess a 20% accuracy-related penalty on the additional tax when underreporting is due to negligence, which includes omitting income shown on a 1099.13Internal Revenue Service. Accuracy-Related Penalty Interest also accrues on the unpaid tax from the original due date, compounded daily; the underpayment rate is 7% for Q1 2026 and 6% for Q2.14Internal Revenue Service. Quarterly Interest Rates
If you catch a missed interest item after filing, amend on Form 1040-X. Correcting yourself before the IRS writes to you won’t wipe out the interest charge, but it generally avoids the accuracy penalty.