Which bond is exempt from federal taxes?
Income from bonds issued by state, city, and local governments (municipal bonds, or munis) is generally free from federal taxes.
Most tax-exempt securities come in the form of municipal bonds, which represent obligations of a state, territory or municipality. For some investors, U.S. Savings Bond interest may also be free from federal income taxes.
Municipal bonds are generally referred to as tax-exempt bonds because the interest earned on the bonds often is excluded from gross income for federal income tax purposes and, in some cases, is also exempt from state and local income taxes.
Interest from EE U.S. savings bonds is taxed at the federal level but not at the state or local levels for income. The interest that savings bonds earn is the amount that a bond can be redeemed for above its face value or original purchase price.
Tennessee Valley Authority (TVA), Federal Home Loan Banks, and Federal Farm Credit Banks agency bonds are exempt from local and state taxes.
Most all interest income earned on municipal bonds is exempt from federal income taxes. When you buy muni bonds issued by the state where you file state taxes, the interest you earn is usually also exempt from state income taxes.
Examples of Exempt Facility Revenue Bonds
Typical examples are terminals, hangars, aircraft repair facilities, freight forwarding/warehousing facilities, etc. If tax-exempt bonds are to be used to finance such facilities, certain limitations and conditions exist.
Tax-Exempt Interest. Interest on a bond that is used to finance government operations generally is not taxable if the bond is issued by a state, the District of Columbia, a U.S. possession, or any of their political subdivisions.
Municipal bonds are federally tax-free and, in some buying a bond is basically extending a loan to a "borrower." In the case of municipal bonds (also known as "muni bonds"), the borrower is a city, county, state or school district.
In some cases, the amount of tax-exempt interest a taxpayer earns can limit the taxpayer's qualification for certain other tax breaks. The most common sources of tax-exempt interest come from municipal bonds or income-producing assets inside of Roth retirement accounts.
What bonds interest is excluded from federal income taxation?
Income from bonds issued by state, city, and local governments (municipal bonds, or munis) is generally free from federal taxes.
You can skip paying taxes on interest earned with Series EE and Series I savings bonds if you're using the money to pay for qualified higher education costs. That includes expenses you pay for yourself, your spouse or a qualified dependent.
And you typically don't have to pay taxes on your earnings until you make withdrawals in retirement. To defer taxes on CD interest until retirement, you can open a CD within a tax-deferred retirement account — whether it's an employer-sponsored plan or an IRA.
The interest earned by purchasing and holding savings bonds is subject to federal tax at the time the bonds are redeemed. However, interest earned on savings bonds is not taxable at the state or local level.
While most securities sold in the U.S. must register with the SEC, the Securities Act of 1933 exempts certain kinds of securities from registration. Examples of exempt securities are: U.S. Treasuries.
Tax-exempt bonds are the primary mechanism through which state and local governments raise capital to finance a wide range of essential public projects.
The interest income on agency bonds generally is subject to federal and state taxes. Interest on certain agency bonds, including securities issued by the FHLB and FFCB, is exempt from state taxes. Agency bonds, when bought at a discount, may subject investors to capital gains taxes when they are sold or redeemed.
Municipal bonds are free from federal taxes and are often free from state taxes. If the bond purchased is from a state other than the purchaser's state of residence, the home state may levy a tax on the bond's interest income.
The simple answer to this question is “yes.” There are two main types: (1) municipal bonds and municipal bond mutual funds and (2) tax-free money market funds.
- Sales of certain food products for human consumption.
- Sales to the U.S. Government.
- Sales of prescription medicines and certain vehicle and vessel transfers.
How to choose between taxable and tax-exempt bonds?
In general, tax-exempt municipal bonds (munis) are more attractive to those in higher tax brackets. To compare municipal bonds to taxable bonds, you need to determine the tax-equivalent yield of the muni. Though certificates of deposit (CDs) carry less risk, municipal bonds have tended to outperform them.
Generally, the interest on municipal bonds is exempt from federal income tax.
Bonds used to fund local and state government projects like buildings and highways are afforded tax-exempt status at the federal level. Plus, people who purchase bonds issued by their states or localities may not be required to pay state or local taxes on the interest.
Using the money for higher education may keep you from paying federal income tax on your savings bond interest.
- Interest from a Series EE or Series I bond — These are types of savings bonds issued by the U.S. government. ...
- Interest from VA insurance dividends — Some people choose to leave interest earned on insurance dividends on deposit.
