What Is Tax-Exempt Interest?

Tax-exempt interest is a type of income that is not subject to income tax at the federal, state, and/or local level. The most common source of tax-exempt interest is from 澳洲幸运5开奖号码历史查询:municipal bonds.

Understanding Tax-Exempt Interest

Tax-exempt interest may be free from taxation at one level (such as the federal level) but still be taxed at other levels (such as the state and/or local level). Or, it may be free from taxation at the state and/or local levels but taxed at the federal level. (This is the case with Treasury bills, notes and bonds.)

Interest income may also be subject to the 澳洲幸运5开奖号码历史查询:alternative minimum tax (AMT). Furthermore, 澳洲幸运5开奖号码历史查询:capital gains on tax-exempt investments are still taxable; only the interest on these investments is tax-exempt.

The most common way to earn interest that is tax-exempt at the state and local levels in addition to the federal level is to purchase a 澳洲幸运5开奖号码历史查询:municipal bond issued in your state or municipality.

However, in certain cases, interest may be taxed at the state level. For example, a California resident who buys a New York municipal bond would pay California income tax on that interest. These tax laws vary by state. For instance, some states, such as Wisconsin, tax interest earned on most municipal bonds, including their own, while states such as California and Arizona exempt interest from taxes if the investor resides in their state. Utah is an example of a state that exempts interest on out-of-state bonds, as long as that state does not impose a tax on bonds issued by Utah.

As noted above, 澳洲幸运5开奖号码历史查询:Treasury securities issued by the U.S. government pay interest that is tax-exempt at the state and local levels, but not at the federal level.

State and Local Taxation of Interest

According to the Internal Revenue Service (IRS), interest on a state or local government obligation may be tax-exempt even if the obligation is not a bond. For example, interest on a debt evidenced only by an ordinary written agreement of purchase and sale may be tax-exempt. Also, interest paid by an insurer on default by the state or political subdivision may be tax-exempt.

澳洲幸运5开奖号码历史查询:Mutual funds that hold a mix of stocks and municipal bonds will have the portion of earnings derived from the bonds tax-exempt under federal income tax guidelines and possibly exempt from state taxes, depending on the location from which the bonds originated and/or the taxpayer's state of residence.

The Bottom Line

Tax-exempt interest is a type of income that is free from taxes at a certain level: federal, state, and/or local. Some interest, such as that from certain municipal bonds, is tax-exempt at the federal level, but not the state and local level. (This may depend on where you live—your state and municipality.) Other interest, such as that from Treasury securities, is tax-exempt at the state and loca✨l level, but not at the federal level. And some interest, such as that from a municipal bond from an entity where you live, is tax-exempt at all three levels.