Interest is income received from a debt instrument (like a bond). When a bond is purchased, the investor lends money to an organization in return for interest. Unlike dividends, interest isn’t taxed favorably. However, depending on the issuer, taxes may be avoided.
As a reminder, here’s the tax status of different types of bond issuers:
US Government debt
Mortgage-backed securities
Municipal debt
Corporate debt
If taxes are due, the applicable tax rate is equal to the investor’s federal marginal income tax bracket. Interest is taxed the same as non-qualified dividends (as we discussed in the previous chapter). As of the tax year 2025, these are the income tax brackets for individuals and those filing jointly:
| Rate | Individuals | Married filing jointly |
|---|---|---|
| 10% | $0 | $0 |
| 12% | $11,926 | $23,851 |
| 22% | $48,476 | $96,951 |
| 24% | $103,351 | $206,701 |
| 32% | $197,301 | $394,601 |
| 35% | $250,526 | $501,051 |
| 37% | $626,351 | $751,601 |
Do not memorize these tax brackets; this chart is only for context.
State taxes depend on the state; you do not need to know the specifics. Interest is reported annually on form 1099-INT.
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