DEFINITION of 'Tax Free'

Tax free refers to certain types of goods and/or financial products (such as municipal bonds) that are not taxed and with earnings that are not taxed. The tax free status of these goods and/or funds may incentivize individuals and business entities to increase spending or investing, resulting in economic stimulus. Governments will often provide a tax break to investors purchasing government bonds to ensure that enough funding will be available for expenditure projects.

BREAKING DOWN 'Tax Free'

Tax free purchases and investments do not incur the typical tax consequence of other purchases and investments. Tax Free Weekends occur in many states where, once or twice a year, store purchases are not taxed, thereby reducing the overall cost to the consumer. Frequently these Tax Free Weekends occur before school starts in the Fall to incentivize spending on school supplies, clothes, computers, calculators etc. Tax free investments such as tax-free municipal bonds (munis) allow investors to earn interest tax free.

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