SIE practice questioneasyMunicipal Bonds — Tax Treatment
Interest income from municipal bonds is generally:
- AExempt from all taxes including capital gains taxes
- BExempt from federal income tax but may be subject to state and local taxes✓ Correct answer
- CTaxable at the corporate tax rate only
- DSubject to federal, state, and local income taxes
Explanation
Why B — Exempt from federal income tax but may be subject to state and local taxes
Municipal bond interest is generally exempt from federal income tax. It may also be exempt from state and local taxes if the investor resides in the state of issuance (triple tax-exempt). However, capital gains on municipal bonds ARE taxable. The interest exemption is the primary advantage of municipal bonds.
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