Interest income that is exempt from federal income tax is referred to as tax-exempt interest. In rare circumstances, a taxpayer’s eligibility for certain other tax advantages may be restricted by the amount of tax-exempt interest the person earns. Municipal bonds and income-producing investments held within Roth retirement accounts are the most frequent sources of tax-exempt interest. Interest income that is tax-exempt is not taxed in any way, especially not at the federal level.
Some municipal bonds could also be “triple-exempt,” meaning that neither federal, state, nor local taxes would be due.
In addition to other tax-advantaged goods and accounts, Roth retirement plans also allow for the earning of tax-exempt interest.
Since it could still be subject to state or municipal taxes, the term “tax-exempt interest” can be a bit misleading. Additionally, it can be subject to the AMT (AMT).
Only the interest on these investments is tax-exempt; capital gains on tax-exempt investments are still subject to taxation.
Buying a municipal bond issued in one’s home state or area is the most typical way for an investor to earn interest that is tax-exempt at the federal, state, and local levels in addition to the level of residency.
