Tax-exempt interest refers to income earned from certain types of investments that are not subject to federal income tax. The most common sources of tax-exempt interest include:
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Municipal Bonds: Interest earned on bonds issued by state and local governments (municipalities) is typically exempt from federal income tax. In some cases, it may also be exempt from state and local taxes, especially if you reside in the state where the bond was issued.
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Savings Bonds: Specifically, U.S. Series EE and Series I savings bonds may provide tax-exempt interest if the bonds are used for qualified education expenses, subject to certain income limitations.
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Certain Loan Programs: Interest from loans made under specific government programs, such as certain housing or educational loan programs, may also be tax-exempt.
It's important to note that while the interest from these sources may be exempt from federal taxes, it could still be subject to state and local taxes. Additionally, tax-exempt interest must be reported on your tax return as it may affect the taxation of other income, such as the taxation of Social Security benefits or the ability to contribute to tax-advantaged accounts.
Always consult with a tax professional or financial advisor for personalized advice and to ensure compliance with current tax laws.