SEE-1 - Income and Assets - Section 2.1

Classify and report taxable income sources including wages, interest, dividends, rental income, Schedule C business income, and virtual currency transactions.

Classify income as taxable or excludable, including wages, interest, dividends, alimony under pre-2019 agreements, rental income, and self-employment income reported on Schedule C. Recognise that virtual currency and other digital asset transactions are treated as property, making each disposal a reportable event for federal income tax purposes.

Gross incomeSchedule CVirtual currencyDigital assets

Practice question for this objective

Free sampleIncome and Assetsmedium

Maria Velasquez received four kinds of interest during the year: interest on a federal income tax refund, interest on a bank certificate of deposit, interest on United States Treasury bonds, and interest on bonds issued by her state to fund highways. Which one is excludable from her gross income for federal purposes?

AInterest on the federal income tax refund
BInterest on the state highway bonds Correct
CInterest on the bank certificate of deposit
DInterest on the United States Treasury bonds

Identify that interest on state and local municipal bonds is excludable from federal gross income while most other interest, including Treasury interest, is taxable federally. Federal law excludes interest on obligations of a state or its political subdivisions from gross income, so state highway bond interest is tax-exempt federally, whereas refund interest, bank interest, and Treasury interest are all taxable for federal purposes.

Why A is wrong: Interest the government pays on a tax refund is taxable interest income, so it is included in gross income rather than excluded.

Why B is correct: Interest on state and local government municipal bonds is excluded from federal gross income under the tax-exempt bond rules, so this is the excludable item.

Why C is wrong: Bank certificate of deposit interest is fully taxable interest income reported on the year it is made available, so it is not excludable.

Why D is wrong: Treasury bond interest is taxable for federal purposes, though exempt from state tax; candidates confuse the two, but it is included in federal gross income.

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