Tax-exempt interest is interest that is reportable on a federal return but not taxed at the federal level, most commonly interest on bonds issued by a state, the District of Columbia, or a U.S. territory. It is shown in box 8 of Form 1099-INT and entered on line 2a of Form 1040 or 1040-SR. Reporting it is an information-reporting requirement only; it does not convert tax-exempt interest into taxable interest. All taxable and tax-exempt interest must be reported on the return even if no Form 1099 was received.

What counts as tax-exempt interest?

Tax-exempt interest is interest that federal law does not tax, primarily interest on certain bonds used to finance government operations issued by a state, the District of Columbia, or a U.S. territory. Each payer should send a Form 1099-INT (or Form 1099-OID for an OID bond) reporting it. Exempt-interest dividends from a mutual fund or other regulated investment company also count, and those are shown in box 12 of Form 1099-DIV.

One common point of confusion: interest on U.S. Treasury bills, notes, and bonds is the opposite case. It is subject to federal income tax but exempt from all state and local income taxes. Treasury interest is taxable federally and belongs in taxable interest, not on line 2a.

Where does tax-exempt interest go on the return?

Tax-exempt stated interest is shown in box 8 of Form 1099-INT, and you enter the total on line 2a of Form 1040 or 1040-SR. Taxable interest goes on line 2b, not 2a. If a client acquired a tax-exempt bond at a premium, only the net amount of tax-exempt interest goes on line 2a, that is, the interest received during the year reduced by the amortized bond premium for the year.

Schedule B (Form 1040) is required when a client has over $1,500 of taxable interest or ordinary dividends. Tax-exempt interest is reported on line 2a regardless of amount.

Why preparers still capture interest that isn't taxed

Tax-exempt interest does not raise the federal tax on the return directly, but it is not a throwaway line. It feeds other calculations. Tax-exempt interest is included in the threshold test that determines how much of a client's Social Security benefits are taxable, so missing it can understate income elsewhere. And if an amount appears in box 9 of Form 1099-INT, that is specified private activity bond interest, which is generally reported on line 2g of Form 6251 for the alternative minimum tax.

For a preparer, line 2a is a capture-and-carry item: pull box 8 onto line 2a, watch box 9 for the AMT entry, and make sure the tax-exempt figure is available to the Social Security and other downstream worksheets. The work is in catching every 1099-INT and reading the right boxes, which is exactly the kind of intake step firms standardize when volume climbs. If you are weighing how to handle that at scale, see how outsourcing tax prep sits on top of your current workflow.

Sources: IRS, "Topic no. 403, Interest received" (reviewed Apr. 10, 2026), irs.gov/taxtopics/tc403; IRS, "Instructions for Schedule B (Form 1040) (2025)" (reviewed Nov. 5, 2025), irs.gov/instructions/i1040sb.