When you earn interest on an investment, the IRS considers this to be taxable interest income. You are required to report this taxable interest as income on your state and federal income tax returns.
Interest earned on your savings accounts, checking accounts, money market accounts, certificates of deposits, corporate bonds and dividends received from investments are all considered taxable interest. Interest earned on installments sales, such as a seller financed property, is also taxable interest income.
The IRS does not tax interest earned on state and local municipalities bonds. Interest earned on insurance dividend deposit accounts at the Department of Veteran's Affairs is also not taxable.
U.S. Government Bonds
Interest earned on Series EE and I savings bonds issued by the U.S. government is not taxable until you redeem the bonds or until they reach their maturity date. If you redeem Series EE or I bonds and use the money to pay for higher education tuition and expenses, the interest you earned on the bonds is not taxable if the expenses meet certain qualifications.