Where to report interest Income from the IRS?

[pataylor]

I want to use the correct box... if that is box 3 then yes, it would be exempt from state and local taxation.

I have found this as it relates to the savings bonds:

31 U.S. Code § 3124 - Exemption from taxation

(a)Stocks and obligations of the United States Government are exempt from taxation by a State or political subdivision of a State. The exemption applies to each form of taxation that would require the obligation, the interest on the obligation, or both, to be considered in computing a tax, except—

This seems to me (not a tax lawyer and this is not legal advice) that this is the statute necessitating Box 3 on the 1099-INT.  What are the arguments for and against IRS interest qualifying for the treatment above?

[odysseus1001]

I had the same question, and the same sense that the IRS did not identify the box and the same hope that the interest would be free from state taxation.  I can't say I've found a definitive answer, *but* I did find a discussion from the Pennsylvania Department of Revenue.  

https://www.revenue.pa.gov/FormsandPublications/PAPersonalIncomeTaxGuide/Pages/Interest.aspx 

In that discussion, Pennsylvania takes the position that this is an "open account" and is therefore not the kind of fixed obligation that would be exempt from state tax.  I can see contrary arguments in theory (for instance, Savings Bonds can be cashed in at any time so they are not really "fixed" the way a Treasury Bond is fixed), but I'm assuming that Pennsylvania didn't make this up. 

Massachusetts has a similar conclusion:  https://www.mass.gov/letter-ruling/letter-ruling-81-12-interest-on-federal-tax-refund   

So unless someone can find another source that explains the difference between open accounts and fixed obligations in a way that supports Box 3 treatment, I suspect that a sophisticated tax lawyer (which I ain't) would tell us that it should be Box 1.

[JulieS]

The interest form the IRS is box 1 interest income. Even the form does not explicitly say so, if you reference the 1099-INT instructions, it cannot be box 3 interest.

Here is the IRS instruction for box 3:

"Enter interest on U.S. Savings Bonds, Treasury bills, Treasury notes, and Treasury bonds. Do not include in box 1. For a taxable covered security acquired at a premium, see Box 12. Bond Premium on U.S. Treasury Obligations, later." - IRS 1099-INT instruction

Box 3 interest is limited to specific types of investments purchased from the Treasury Department. 

The IRS charges you interest when you don't pay on time, so they pay you interest when they have kept your money too long. 

[Critter-3]

Agreed ... it is box 1 interest ... 30 years in the income tax business + 8 years of teaching the income tax prep course = the correct answer of box 1.