Question

Grace invests in taxable bonds, bonds earn interest of $8,000 each year. What is the tax treatment or consequence?

a) Tax-exempt interest income
b) Taxable interest income
c) Capital gain
d) Return of principal

Answer 1

The interest income of $8,000 earned annually from taxable bonds would be considered taxable interest income and must be included in Grace's tax return.

Step-by-step explanation:

When Grace invests in taxable bonds which earn an interest of $8,000 each year, the tax treatment or consequence for the interest income would generally be considered taxable interest income.

This means that the interest earned from these bonds must be reported on her tax return and will be subject to federal income tax, and possibly state income tax depending on her state of residence. This interest income does not qualify as tax-exempt, because it is specified that the bonds are taxable, nor is it a capital gain or a return of principal, as it represents the earnings received from the bond's interest payments.

The interest income of $8,000 earned annually from taxable bonds would be considered taxable interest income and must be included in Grace's tax return.