Accrued

• Accrued interest is normally associated with bonds. When someone purchases a bond, or a company or government's debt, he is doing so with the expectation of earning interest on his principal. This interest is paid according to a specific schedule. For a bond, the accrued interest includes any interest earned since the last coupon payment. Therefore, accrued interest is that which has been earned but not received by the bondholder, in exchange for retaining the bond for a specified amount of time.
  
  

Income

• In contrast to accrued interest, interest income can be earned on a wide variety of investment types. Savings accounts, certificates of deposit, stock dividends and treasury notes, as well as others, can all earn interest. While this type of income is considered passive, or that which is not directly earned by the taxpayer, like a wage or salary, the IRS still requires taxpayers to report all interest income received during the given tax year.
  
  

Exceptions

• There are times when a bondholder or interest earner may not be subject to taxation. If a bond is sold in between coupon payments, the bondholder does not directly receive the interest. Instead, the value of the accrued interest is added to the sale price of the bond, to be reported by the taxpayer as capital gains at the end of the tax year. Likewise, some forms of interest-bearing investments are exempt or tax deferred, such as foreign holding and IRAs.
  
  

Taxes

• If you earn interest from investments held in a company or brokerage account, they are responsible for sending you a 1099-INT, a copy of your interest information as reported to the IRS. Your interest-bearing records should match up with your 1099-INT, which shows the difference between the amount you received and the amount paid, if the interest-bearing security was sold. For interest earned totaling less than $1,500, a 1040A or 1040EZ may be used, otherwise a schedule B form should be submitted.