Intuit Academy Tax Practice Exam 2025 – 400 Free Practice Questions to Pass the Exam

Interest income is typically taxed as ordinary income, which means it is subject to the same tax rates that apply to wages and salaries. Taxpayers must report all interest income on their tax returns, and it is included in their overall taxable income. This treatment applies to interest earned from various sources, such as savings accounts, bonds, and loans, making it a significant aspect of individual income taxation.

The idea that interest income is generally tax-exempt is not accurate, as most interest income, with some exceptions (such as interest earned on municipal bonds), is taxable at the federal level. Furthermore, interest income is not taxed at a lower rate than capital gains—capital gains, especially for long-term investments, can enjoy preferential tax rates. Lastly, there is no minimum threshold that must be met before interest income is taxed; all interest received must be reported regardless of the amount. Thus, the correct treatment of interest income aligns with it being taxed as ordinary income.