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Which statement correctly describes interest earned on deposit accounts?
ASome accounts earn no interest, and interest can be taxed
BEvery deposit account earns interest, and it is tax free
CEvery deposit account earns interest, and it is taxed
DSome accounts earn no interest, and interest is tax free
Answer & Solution
Correct answer: A. Some accounts earn no interest, and interest can be taxed
1. Paying interest is a feature of some deposit accounts, not a rule that binds all of them.
2. So a customer cannot assume that any given account will credit interest.
3. Interest that is credited counts as income, so tax may fall due on it.
4. Both halves of the correct choice hold: interest is not universal and it is not automatically tax free.
5. The two options claiming every account earns interest overstate the guarantee.
_Source: FDIC Money Smart for Adults (September 2018), Module 5: Your Savings, section Interest and Compounding_
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