IRS Publication 17 — Your Federal Income Tax (Individuals)

Bonds Sold Between Interest Dates If you sell a bond between interest payment dates, part of the sales price represents interest accrued to the date of sale. You must report that part of the sales price as interest income for the year of sale.

If you buy a bond between interest payment dates, part of the purchase price represents interest accrued before the date of purchase. When that interest is paid to you, treat it as a nontaxable return of your capital investment, rather than as interest income. See Accrued interest on bonds under How To Report Interest Income in chapter 1 of Pub. 550 for information on reporting the payment.

Insurance Life insurance proceeds paid to you as beneficiary of the insured person are usually not taxable. But if you receive the proceeds in installments, you must usually report a part of each installment payment as interest income.

For more information about insurance proceeds received in installments, see Pub. 525. Annuity. If you buy an annuity with life insurance proceeds, the annuity payments you receive are taxed as pension and annuity income from a nonqualified plan, not as interest income. See chapter 5 for information on pension and annuity income from nonqualified plans.

State or Local Government Obligations Interest on a bond used to finance government operations generally isn’t taxable if the bond is issued by a state, the District of Columbia, a territory of the United States, or any of their political subdivisions. Bonds issued after 1982 by an Indian tribal government (including tribal economic development bonds issued after February 17, 2009) are treated as issued by a state. Interest on these bonds is generally tax exempt if the bonds are part of an issue of which substantially all proceeds are to be used in the exercise of any essential government function. However, the essential government function requirement does not apply to tribal economic development bonds issued after February 17, 2009. See section 7871(f).

For information on federally guaranteed bonds, mortgage revenue bonds, arbitrage bonds, private activity bonds, qualified bonds, and tax credit bonds, including whether interest on some of these bonds is taxable, see State or Local Government Obligations in chapter 1 of Pub. 550.

Information reporting requirement. If you file a tax return, you are required to show any tax-exempt interest you received on your return. Tax-exempt interest paid to you will be reported to you on Form 1099-INT , box 8. This is an information reporting requirement only. It doesn’t change tax-exempt interest to taxable interest. Original Issue Discount (OID) OID is a form of interest. You generally include OID in your income as it accrues over the term of the debt instrument, whether or not you receive any payments from the issuer.