Series 7 practice questioneasyTax Implications — Municipal Bond Taxation
Interest on U.S. Territory bonds (such as Puerto Rico, Guam, and the Virgin Islands) is:
- ASubject to federal income tax
- BExempt from federal, state, and local income tax (triple tax-exempt)✓ Correct answer
- CExempt from federal tax but subject to state tax
- DTaxable at a reduced rate of 10%
Explanation
Why B — Exempt from federal, state, and local income tax (triple tax-exempt)
Bonds issued by U.S. territories (Puerto Rico, Guam, U.S. Virgin Islands, American Samoa) are triple tax-exempt — the interest is exempt from federal, state, and local income taxes regardless of where the investor resides. This makes them attractive to investors in high-tax states, as no state offers this same universal triple exemption for its own bonds.
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