Generally, most interest income is taxed at the same federal STEP TAX RATE as ordinary taxable income. Examples of taxable interest include interest on bank accounts, money market accounts, certificates of deposit, and deposited insurance dividends. Interest income from Treasury bills, notes and bonds is taxable as well.

However, taxpayer may be able to exclude some or part of interest from taxable income. For example:
• Interest redeemed from Series EE and Series I bonds issued after 1989 may be excluded from income if used to pay for qualified higher education expenses during the year and taxpayer meets other requirements for the Education Savings Bond Program. (IRS Topic 403)
• Interest income from municipal bonds is not taxable at the federal level.
• Interest on insurance dividends left on deposit with U.S. Department of Veterans Affairs is not taxable.

Nonresident aliens are not taxable on certain kinds of interest income as follows, per Internal Revenue Code subsections 871(h) and (i), provided that such interest income arises from one of the following sources and is not connected with a trade or business:
• A U.S. bank
• A U.S. savings and loan association.
• A U.S. credit union.
• A U.S. insurance company.
• Portfolio Interest.

Interest income from Massachusetts municipal bonds is not taxable in Massachusetts. In addition, certain interest defined as Massachusetts bank interest qualifies for an exemption of either $100 or $200 (depending on filing status) in Massachusetts return.