SIE practice questionhardMunicipal Bonds - Taxation
Which best describes the federal tax status of interest earned on most municipal bonds?
- AInterest is generally exempt from federal income tax✓ Correct answer
- BInterest is subject to both federal and state income tax
- CInterest is always exempt from all taxation
- DInterest is taxed at the capital gains rate
Explanation
Why A — Interest is generally exempt from federal income tax
Most municipal bond interest is exempt from federal tax, though it may be subject to state/local tax. It is not always completely exempt (C), and it is not taxed as a capital gain (D).
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