FINRA Series 7Investment Information and Suitable RecommendationsHard
A client asks about the taxation of interest received from GNMA (Government National Mortgage Association) pass-through certificates. The representative should explain that this interest is:
- AExempt from federal, state, and local taxes
- BTaxable only if the investor is in a high tax bracket
- CExempt from state and local taxes but taxable at the federal level
- DTaxable at the federal, state, and local levels
Show answer & explanationAnswer & explanation
Correct answer: D. Taxable at the federal, state, and local levels
Unlike direct U.S. Treasury obligations, GNMA securities are taxed at all levels — federal, state, and local — because GNMA is a government agency guarantee on privately issued mortgage-backed pass-through certificates, not a direct Treasury obligation.
Why the other options are wrong
- A. This describes municipal bond tax treatment, not GNMA.
- B. Tax treatment does not depend on the investor's tax bracket.
- C. This describes the tax treatment of direct Treasury securities, not GNMAs.
GNMA Tax Treatment
Interest income from GNMA (Ginnie Mae) pass-through certificates is fully taxable at the federal, state, and local levels, unlike direct Treasury securities.
- GNMA is fully backed by U.S. government guarantee
- Not a direct Treasury obligation, so no state/local exemption
- Pass-through payments include both principal and interest
Memory trick: 'Ginnie Mae pays no exemptions — tax hits at every gate.'