The taxpayer's Form(s) 1099-INT may list both taxable and tax-exempt interest. Read the form(s) carefully.
Although tax-exempt interest is not taxable, it must be reported on Form 1040, line 8b. It is used in calculating the taxability of certain income items, such as social security benefits.
Certain types of interest are exempt from federal income tax. However, they may be taxable by the state. Sometimes the reverse is true; some interest may be taxable on the federal return and exempt from state income tax.
Bonds issued by the following are exempt from federal income tax:
Interest income is reported to the taxpayer on Form 1099-INT, Interest Income. Financial Institutions and brokerages forward copies of Form 1099-INT to the IRS.