Tax Unit: Module 3

For Consumer Math Class

East Jackson High School

Module 3: Interest Income

Introduction

Interest can be taxable or tax-exempt.

All interest must be reported on the tax return.

Interest

Interest is the charge for the use of borrowed money.

Your money earns interest when it is Deposited in accounts in banks,

savings and loans, and credit unions.

Used to buy certificates of deposit or bonds.

Lent to another person or business.

Interest is considered unearned income because money, not a person, is working to earn the income.

Taxable Interest

Taxable interest income is earned from• savings and checking accounts• U.S. Savings Bonds• savings certificates (certificates of deposit

or CDs)• money market certificates

Tax-exempt Interest

Tax-exempt interest income is earned from bonds issued by entities in states, cities, counties, or the District of Columbia, such as:• port authorities• toll-road commissions• community redevelopment agencies• qualified volunteer fire departments

Quick Check!

____1. Interest income is earned on all of the following excepta. U.S. Saving Bondsb. rental propertiesc. deposits in savings accountsd. deposits in credit union accounts

____2. Which statement is not true?a. Interest is the charge for the use of money.b. Interest income is considered unearned income.c. Interest income may be taxable or tax-exempt.d. The U.S. government does not pay interest.

____3. Alexa earned $145 from money in her savings account.a. Taxableb. Tax-exempt

____4. LaKeisha earned $135 on bonds issued by the Ohio Water Authority.a. Taxableb. Tax-exempt

1099-INT

Interest income is usually reported on Form 1099-INT It is important to report each Form 1099-INT

separately. Taxable interest income is reported on the tax return,

even if the taxpayer does not receive Form 1099-INT.

Quick Check!

1. How much taxable interest income did Maurice earn? ___________

___2. Did Maurice earn any interest on U.S. Savings Bonds?

a. Yesb. No

___3. Did Maurice have any federal income tax withheld on the interest he earned?

a. Yesb. No

$78.21

Review!

_____1. Interest income is earned on money in savings accounts.

a. Trueb. False

______2. All interest income is taxable.a. Trueb. False

______3. Tax-exempt interest is not reported on the individual income tax return.

a. Trueb. False

______4. Form 1099-INT is used to report interest income.

a. Trueb. False

Simulation for Module 3Using Your W-2 and Form 1099-INT to File Your 1040EZ

o Your name is Tasha Miller.

o You are an administrator at the Job Center.

o You are single with no children.

o You are a U.S. Citizen.

o Your favorite aunt dies and leaves $2000 to you in her will. You deposit the money in a savings account at your bank.

o Inheritance is tax-free, but interest earned on it is subject to tax.

Congratulations!

Your have just successfully completed Module 3!

All information came from the Internal Revenue Service Understanding Taxes Program

www.irs.gov/app/understandingTaxes/jsp/S_student_lessons.jsp