Tax Preparer Guide to 1040 Chapter 5 Interest Income

Question 1

Interest

Answer 1

Is a fee charged by a lender to a borrower for the use of money. Interest may be earned from different sources, including bank accounts, loans, bonds, and notes.

Question 2

Sources of taxable interest

Answer 2

Taxable interest typically is paid on bank accounts and certificates of deposit.
U.S obligations- Interest on U.S Treasury bills, notes, and bonds issued by any agency or instrumentality of the United States is taxable.

Question 3

Original Issue Discount

Answer 3

is interest that accrues over the time of a debt instrument and is taxable as it accrues, even if not currently paid to the taxpayer.

Question 4

What is a bond

Answer 4

Bonds are a type of loan- the bond owner lends money to the issuer and receives interest in return. Interest on corporate bonds and federal bonds usually are taxable. Interest on state and local (municipal) bonds usually are not taxable.

Question 5

What is a Series HH savings bond?

Answer 5

The Series HH bond was a 20-year, non-marketable savings bond issued by the U.S. government. The Series HH bond pays semi-annual interest based on a coupon rate. The coupon was locked in at a fixed rate for the first ten years, after which the U.S. Treasury reset it for the rest of the bond’s life.

Question 6

Education Redemption

Answer 6

Interest on qualified U.S savings bonds that would otherwise be taxable can qualify for an exclusion if the proceeds are used to pay for certain education expenses.

Question 7

Treasury Inflation-Protection Securities (TIPS)

Answer 7

TIPS are securities that pay interest twice a year at a fixed rate as well as adjust the principal amount for inflation. The interest earned as well as the increase of the principal value is taxable currently even though the taxpayer does not receive the adjusted principal value until the bond’s maturity.

Question 8

State and Municipal Bonds

Answer 8

Interest paid by state and local governments or agencies on their bonds or other instruments is not taxable for federal income tax purposes.

Question 9

Nominee

Answer 9

Is a person who receives interest that partially or fully belongs to another owner. This typically occurs when two or more people co-own a bank account.