Oregon Tax Consultants Practice Exam

On which form is tax-exempt interest reported?

1. 1040 Line 2a

2. Schedule B

3. Schedule E

4. Form 8949

The correct answer is: 1040 Line 2a

Tax-exempt interest is reported directly on Form 1040, specifically on Line 2a. This line is designated to capture income that is not subject to federal income tax, which includes interest from municipal bonds and certain other exempt sources. By including tax-exempt interest on this line, taxpayers can understand the total amount earned, even though it won't be included in taxable income. While some of the other options mention forms and schedules related to reporting income, they do not directly address the reporting of tax-exempt interest in the same way. Schedule B is utilized to report interest and ordinary dividends, but it is mainly a summary schedule that backs up entries on Form 1040. Schedule E is for reporting supplemental income and losses, specifically from rental real estate, royalties, partnerships, S corporations, estates, trusts, and more, which is unrelated to tax-exempt interest. Form 8949 is used for reporting capital gains and losses from the sale of investments, which also does not involve tax-exempt interest. Thus, the placement of tax-exempt interest on Line 2a of Form 1040 accurately reflects its nature as income that is acknowledged but not taxable.