DEFINITION of 'Double Exempt'

The status accorded to municipal bonds for which interest is not subject to taxation at either the federal or state level. In general, most states do not tax residents on interest income arising from tax-exempt bonds issued by that state, its agencies, its cities or other political entities. However, virtually all states tax individuals on interest from bonds issued out-of-state, although those bonds remain exempt from federal taxes.

BREAKING DOWN 'Double Exempt'

Municipal bonds, including those for which the interest is not taxable at the state or local level, are attractive to taxpayers who wish to minimize or avoid taxes on their interest income. These securities often pay a commensurately lower interest rate than taxable issues such as corporate bonds, although depending on one's tax bracket and comparative yields, they may sometimes yield more on an after-tax basis. Double exempt bond income can be an AMT preference item in some cases.

From a tax perspective, this treatment often makes bonds issued in one's home state more attractive than those issued out-of-state. Some interest from municipal securities is also exempt from local income tax in jurisdictions where such taxes apply, technically making them triple tax-exempt.

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