Deferred Interest that is paid in intervals of one year or less is included in taxable income when the taxpayer could receive it without paying a substantial penalty. If interest on a CD is deferred for more than one year, the taxpayer must include a part of the interest in income each year. Original Issue Discount (OID) interest is generally reported as it accrues over the term of the obligation.
Life insurance proceeds are generally exempt from tax. However, if the insurance proceeds pay interest, then the interest payments must be included as taxable income.
Contributions to a Coverdell ESA are not deductible. Increases in the ESA are tax-free until they are distributed. However, no tax is due on the year's distributions if they were less than what the beneficiary spent on qualified education expenses.
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