Series 7 practice questionmediumDebt Securities — Municipal Bonds — Tax Advantage Scenario
An investor in the 37% tax bracket earns $5,000 in interest from a municipal bond. How much federal income tax is owed on this interest?
- A$1,850
- B$1,000
- C$0✓ Correct answer
- D$500
Explanation
Why C — $0
Interest income from municipal bonds is generally exempt from federal income tax. This is one of the primary advantages of investing in municipal bonds, particularly for investors in higher tax brackets. However, some municipal bond interest may be subject to the Alternative Minimum Tax (AMT), and capital gains from selling municipal bonds are taxable. State tax treatment varies by state.
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