Which type of income is considered tax exempt?

Interest from certain municipal bonds is considered tax-exempt income primarily because it is issued by state and local governments to raise funds for public projects. The federal government generally does not tax this income, making it an attractive investment option for individuals seeking to minimize their tax liability. Depending on the bond and the state of residence, this interest may also be exempt from state and local income taxes, further enhancing its tax benefits.

This unique status arises from the intention behind municipal bonds; they aim to support public services and infrastructure, encouraging investors to support governmental initiatives without the burden of federal taxation on the interest they earn. This structure not only incentivizes investment in public projects but also allows investors in higher tax brackets to benefit significantly from the tax-exempt nature of this income.