What Is Interest?

Generally, the payor of the income amounts you receive will distinguish between interest and dividends, and will send you the appropriate form reporting the correct dollar amount you received during the year.

Some items that you might consider to be "interest" are treated as dividends by the IRS (for example, income from money market funds) and some things you might think of as "dividends" are treated as interest (for example, dividends from tax-free municipal bond funds).

Other items that are commonly called "dividends" but that are treated as interest and reported in Part I of Schedule B are income from accounts in cooperative banks, credit unions, domestic building and loan associations, domestic savings and loans, federal savings and loans, and mutual savings banks.

Special rules apply to:

Tip

Beginning in 2013, a new 3.8 percent net investment income tax may be imposed on individuals whose modified adjusted gross income exceeds $250,000 for joint filers, $125,000 for married taxpayers filing separately, and $200,000 for others. Trusts and estates with income over a certain amount are also subject to the NII tax. Form 8960, Net Investment Income Tax� Individuals, Estates, and Trusts is attached to the tax return. For 2013, the IRS has provided taxpayers the ability to rely on more than one set of net investment income tax rules. The best choice varies by taxpayers and depends on the taxpayer's unique situation. Consult your advisor to determine which approach would be best for you.