The interest income is mainly from bonds, savings accounts, or certificates of deposit (CDs). Capital gains and dividends have special tax breaks and lowered rates. Interest income always falls at the ordinary rate, depending on one's total taxable income.
Interest income encompasses dividends from corporate bonds; municipal bonds-except interest from municipal bonds is frequently exempt from taxes at the federal level; savings account dividends; and most other investments with fixed returns. Unlike dividends and capital gains, interest is taxed directly, even if reinvested.
Example: Suppose you earn $1,000 in interest from a bond or savings account and your tax rate is 22%. You would owe $220 in taxes on that interest income.