Where to Find Tax-Exempt Interest Income on Your Taxes

Tax-exempt interest income is an important part of many investors’ portfolios, and knowing where to find it on your tax forms is essential when it comes to preparing your tax return. While this type of income—  commonly earned from municipal bonds, certain U.S. savings bonds and other qualifying investments—is not subject to federal income tax, it still must be reported to the IRS. Additionally, state and local taxation rules vary, and some tax-exempt interest may still be subject to state taxes, depending on where you live and where the bonds were issued.

A financial advisor can help you manage tax-exempt investments by reporting them correctly and optimizing your portfolio for tax efficiency.

Where to Find Tax-Exempt Interest Income

Tax-exempt interest income is reported on various tax documents. The primary place you’ll locate tax-exempt interest income is on Form 1099-INT, which financial institutions issue to investors who have earned interest income throughout the year. However, there are other documents where you may find it mentioned.

Here is a list of where to look for tax-exempt interest income on tax forms:

• Form 1099-INT (interest income). Tax-exempt interest income is reported in Box 8, labeled “Tax-Exempt Interest.” If any portion of this income is subject to alternative minimum tax (AMT), it will be separately reported in Box 9, labeled “Specified Private Activity Bond Interest.”
• Form 1040 (U.S. individual income tax return). Even though tax-exempt interest income is not taxable, it must still be reported on Line 2a of Form 1040.
• Schedule B (interest and ordinary dividends). If a taxpayer earns a significant amount of interest income, including tax-exempt interest, it may also be required to be reported on Schedule B.
• State tax forms. Some states require taxpayers to separately report tax-exempt interest income if it is from out-of-state municipal bonds, which may still be taxable at the state level.

You should note that while tax-exempt interest income does not contribute to federal taxable income, it may still be used in financial calculations that affect tax liability, such as Social Security benefit taxation and income-based phaseouts for tax credits or deductions.

How Tax-Exempt Interest Income Is Used

While tax-exempt interest income reduces overall tax liability, it is still factored into certain financial calculations. 

For example, tax-exempt interest is included in modified adjusted gross income (MAGI), which is used to determine whether Social Security benefits are taxable. Additionally, some tax-exempt bonds, such as private activity bonds, may be subject to the alternative minimum tax.

Investors often weigh the benefits of tax-exempt bonds against taxable investments by comparing their after-tax yields. While tax-exempt bonds may offer lower interest rates than taxable bonds, their tax advantages can make them more attractive for individuals in higher tax brackets.

State vs. Local Interest Taxation

Although tax-exempt interest income is generally not subject to federal taxes, state and local taxation varies depending on where the bonds are issued and where the investor resides. This can significantly impact the after-tax returns of tax-exempt investments.

Here’s how states typically tax tax-exempt interest income: 

• In-state municipal bonds. Interest earned from municipal bonds issued within a taxpayer’s home state is typically exempt from state and local taxes.
• Out-of-state municipal bonds. If an investor holds municipal bonds issued by another state, that interest may be taxable at the state level. Investors should check with their state’s tax authority to determine if out-of-state municipal bond interest is subject to state income tax.
• U.S. territory bonds. Interest from bonds issued by U.S. territories, such as Puerto Rico, Guam and the U.S. Virgin Islands, is generally exempt from federal, state and local taxes.

Additionally, some municipalities may impose local taxes on tax-exempt interest income, even if the state does not.

Frequently Asked Questions

Is tax-exempt interest income subject to the alternative minimum tax (AMT)?

Some tax-exempt interest income, particularly from private activity bonds, may be subject to the AMT. If applicable, this will be reported in Box 9 of Form 1099-INT and should be considered when calculating AMT liability.

Can tax-exempt interest income affect my state taxes?

Yes, while federal tax law exempts certain interest income, states have their own rules. Interest from in-state municipal bonds is often tax-free at the state level, while interest from out-of-state bonds may be subject to state income tax.

Bottom Line

Knowing where to report tax-exempt interest income on your tax forms could help you comply with IRS rules. Although this income isn’t taxed federally, it must still be listed on Form 1040 and Form 1099-INT, and sometimes on state tax returns. State and local tax rules differ, so some tax-exempt interest may still be taxable at these levels. A financial advisor can clarify tax-exempt investments and create a tax strategy that fits your financial goals.

Tax Planning Tips

• A financial advisor can help you manage taxes for your portfolio. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• If you want to know how much your next tax refund or balance could be, SmartAsset’s tax return calculator can help you get an estimate.

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