When is interest income in a deferred annuity reported for federal income taxes?

The correct answer is that interest income in a deferred annuity is reported for federal income taxes when the distributions are received. This is because a deferred annuity allows the individual to accumulate earnings tax-deferred until they begin withdrawing funds. The tax advantage of deferring taxes on this interest income is a significant benefit of annuities.

Only once distributions, such as withdrawals or annuitized payments, are taken do individuals owe taxes on the accumulated earnings. This means that policyholders do not have to pay taxes on the growth of their investment until they benefit from it, making it a compelling option for long-term savings strategies.

The other options provided reflect situations that do not align with the IRS's treatment of deferred annuities. The purchase of the annuity does not trigger a tax event, nor does interest accumulate as taxable income at the end of each tax year or upon the policyholder's death unless distributions are made. This structure underscores the nature of tax-deferred growth that is characteristic of these financial products.