Interest is income you receive from a debt instrument (such as a bond). When you buy a bond, you’re lending money to an issuer, and the issuer pays you interest in return.

Unlike dividends, interest generally doesn’t receive favorable tax treatment. That said, the tax rules depend on who issued the bond, and some interest may be exempt from certain taxes.

As a reminder, here’s the tax status of different types of bond issuers:

US Government debt

• Subject to federal taxes
• Exempt from state and local taxes

Mortgage-backed securities

• Subject to federal, state, and local taxes

Municipal debt

• Exempt from federal taxes
• Subject to state and local taxes
• 100% tax-free if:
  • Resident
  • Territory bond

Corporate debt

• Subject to federal, state, and local taxes

If taxes are due, the federal tax rate applied to interest is the investor’s federal marginal income tax bracket. Interest is taxed the same as non-qualified dividends (as 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.

Definitions

Marginal tax bracket

The tax bracket applied to the last dollar earned

Example: An individual making $50,000 would pay a 10% tax on the first $11,925 earned, a 12% tax on additional income up to $48,475, and a 22% tax on the remaining income. Even though the investor pays multiple rates across different portions of income, their marginal tax bracket is 22%.

State taxes depend on the state, and you don’t need to know the specifics. Interest is reported annually on form 1099-INT.