Final answer:
Interest earned on U.S. federal Treasury Bonds must be included in gross income for federal tax purposes. Treasury bonds are considered a secure investment, and their interest rates typically correlate with corporate bond rates, but with lower risk.
Step-by-step explanation:
Interest earned on United States federal Treasury Bonds, often referred to as Treasury notes and Treasury bills, is generally considered taxable income for federal tax purposes. It should be included in your gross income when filing tax returns. The U.S. government, despite offering relatively low interest rates, especially over the past decade, has never defaulted on its bonds. This reliability makes Treasury bonds a secure investment, commonly purchased by individuals, banks, and sovereign funds globally.
While corporate bonds may offer higher interest due to increased risk, Treasury bonds tend to offer higher returns than bank accounts, and their interest rates often move in parallel with corporate bond rates. When it comes to tax implications, the interest received from these bonds is reported on tax forms and influences the calculation of adjusted gross income, which also takes into account standard deductions and exemptions.
As per the Taxation Basics, all forms of income, including wages, interest income, and unemployment compensation, are part of the adjusted gross income. Treasury notes and bonds, with maturities ranging from 2 to 30 years, are considered long-term loans and come in various denominations, contributing to their popularity amongst investors.