Intuit Academy Tax Practice Exam

Tax-exempt interest income refers to interest earned on certain investments that are not subject to federal income tax. While this type of income may be exempt from taxation, it is still required to be reported on Form 1040.

The correct understanding of tax-exempt interest income is that it must be included on the return; however, it is not included in the taxable income calculation. Taxpayers need to report this income to provide a complete picture of their income even though it's not subject to tax.

Reporting tax-exempt interest is important as it can affect eligibility for other tax credits and deductions, as well as state taxes, which may treat this income differently. Therefore, the assertion that tax-exempt interest income is not reportable is incorrect; it must be disclosed on the appropriate line of Form 1040.