Module 3: Interest Income

Educational Standards

State and National Standards

Time Frame

One to two hours

Curriculum Area(s)

• Technology
• Civics/Government
• Family and Consumer Sciences
• History/Social Studies
• Economics

Purpose

To help students understand that most interest income is taxable

Objectives

Students will be able to:

• identify taxable interest income.
• report taxable and tax-exempt interest income.

Background

Interest is the charge for the use of borrowed money. A common way to earn interest income is to deposit funds in a financial institution, such as a bank or credit union. Most interest income is taxable-that is, it is subject to income tax. Tax-exempt interest income is not subject to income tax and is earned on funds loaned to states, cities, counties, or the District of Columbia. In most cases, interest income is reported on Form 1099-INT. All taxable interest income is reported on the taxpayer's return, even if it is not reported on Form 1099-INT.

Key Terms

interest

The charge for the use of borrowed money.

interest income

The income a person receives from certain bank accounts or from lending money to someone else.

taxable interest income

Interest income that is subject to income tax. All interest income is taxable unless specifically excluded.

tax-exempt interest income

Interest income that is not subject to income tax. Tax-exempt interest income is earned from bonds issued by states, cities, or counties and the District of Columbia.

Opening the Lesson

Hand out Fact Sheet-Interest Income. Use the following questions to prompt students to share what they know about interest:

• What is interest? (Interest is the charge for the use of borrowed money.)
• In what situations does a taxpayer earn interest? (when taxpayers place money in a savings program, a certificate of deposit [CD], or bond)
• In what situations does a taxpayer owe interest? (when taxpayers borrow money)

Then, explain that this lesson focuses on interest income, not interest expense.

Note: Refer students who may want to work independently on this module to Student Lesson-Interest Income.

Developing the Lesson

Direct students to Tax Tutorial-Interest Income, and explain that this tax tutorial focuses on taxable and tax-exempt interest income. Tell students that they will learn how interest income is reported to them and, in turn, how they report interest income on their tax returns. Inform students that they will have an opportunity to look at tax forms associated with interest income.

Concluding the Lesson

After students have completed Tax Tutorial-Interest Income and Simulation 3-Using Your W-2 and Form 1099-INT to File Your 1040EZ, ask them whether they have questions about interest income or Form 1099-INT. To ensure that they understand the difference between interest income and interest expense, ask the following questions:

• What is an example of when you would pay interest? (car loans, tuition loans, mortgages, credit card debt)
• What is an example of when you would earn interest? (when money is loaned to financial institutions or friends)