Securities Industry Essentials (SIE) ExamKnowledge of Capital MarketsHard
A municipal bond issued by a state government is typically exempt from which of the following taxes?
- AFederal, state, and local income taxes for residents of the issuing state.
- BState and local income taxes only.
- CAll federal, state, and local taxes regardless of residency.
- DFederal income tax only.
Show answer & explanationAnswer & explanation
Correct answer: A. Federal, state, and local income taxes for residents of the issuing state.
Interest income from municipal bonds is generally exempt from federal income tax. Additionally, if the bondholder is a resident of the state or municipality that issued the bond, the interest income is typically exempt from state and local income taxes as well. This is known as the 'triple tax exemption'.
Why the other options are wrong
- B. This is incorrect; federal exemption is the most universal for munis.
- C. This is incorrect; residency in the issuing state is usually required for state and local tax exemption.
- D. While federal tax exemption is common, it's not the only potential exemption.
Municipal Bond Tax Exemption
Interest income from municipal bonds is generally exempt from federal income tax. It may also be exempt from state and local income taxes if the bondholder resides in the issuing state.
- Federal tax exemption is standard.
- State/local exemption is for 'in-state' residents.
- This 'triple tax exemption' makes munis attractive to high-income earners.
Memory trick: Munis are 'Mighty' for 'Minimizing' taxes, especially 'My' state's.