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Begin by reviewing the introductory section, which outlines the purpose of municipal bonds. Familiarize yourself with key terms such as 'governmental bonds' and 'private activity bonds' to understand the context.
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Are state and local bonds tax-exempt?

Income from bonds issued by state, city, and local governments (municipal bonds, or munis) is generally free from federal taxes. Market discount for municipal bonds is taxable interest income and not tax-exempt interest income. You will, however, have to report this income when filing your taxes.

What is a tax-exempt bond?

Local and state governments issue bonds when they need the cash to build a new facility or to fund their operations. When they issue the bonds, they receive money from the bondholder and promise to pay interest and principal for the entire bonds life (which can be range from a few years to a hundred years).

How do tax-exempt bonds work for dummies?

Tax Status Municipal bonds are generally referred to as tax-exempt bonds because the interest earned on the bonds often is excluded from gross income for federal income tax purposes and, in some cases, is also exempt from state and local income taxes.

Why buy tax-exempt bonds?

For individuals, municipal bonds are commonly purchased for their tax-exempt income. Others purchase municipal bonds for their future trading value. Banks might purchase municipal bonds of local issuers to show their interest in the community.

What is an example of a tax-exempt bond?

Municipal bonds can offer tax-exempt income, making them attractive for high-income investors seeking stable, low-risk returns. There are several ways to invest in municipal bonds, depending on your financial goals, risk tolerance, investment knowledge, and how much control you want over your portfolio.