Tax-Exempt Security

DEFINITION of 'Tax-Exempt Security'

A security in which the income produced is free from federal, state and local taxes. Most tax-exempt securities come in the form of municipal bonds, which represent obligations of a state, territory or municipality. For some investors, U.S. savings bond interest may also be free from federal income taxes.


BREAKING DOWN 'Tax-Exempt Security'

Depending on where the investor lives, a tax-exempt security may be free from all taxes. An in-state resident will usually receive a state and federal tax exemption on general obligation bonds from his or her home state.

A tax-exempt security will carry a tax-equivalent yield that is often higher than the current yield, as determined by the investor's tax bracket. The higher the tax bracket, the more beneficial tax-exempt securities can become in a taxable investment account.


RELATED TERMS
  1. Tax-Exempt Interest

    Interest income that is not subject to federal income tax. Tax-exempt ...
  2. Tax-Exempt Sector

    The market niche comprised of investment vehicles exempt from ...
  3. Double Exempt

    The status accorded to municipal bonds for which interest is ...
  4. Tax Exempt

    To be free from, or not subject to, taxation by regulators or ...
  5. After-Tax Basis

    A comparison of the net yields produced by taxable and tax-exempt ...
  6. Triple-Tax-Free

    An investment (usually a municipal bond) featuring interest payments ...
Related Articles
  1. Retirement

    Why Retirees Can't Count on Muni Bonds

    Interest may not be tax-exempt for seniors with Medicare or Social Security benefits.
  2. ETFs & Mutual Funds

    Do Municipal Bond Mutual Funds Offer a Tax Incentive?

    Learn about individual municipal securities and municipal bond funds, whose principal stability and tax-free yield appeal to high-income investors.
  3. Managing Wealth

    Muni Bonds, Taxable Bonds or CDs: Which is Best?

    Here's how to tell if municipal bonds are a better investment than taxable bonds or CDs.
  4. Retirement

    3 Tax-Reduction Strategies for High-Net-Worth Investors

    Learn about three tax strategies that reduce taxable income and minimize the share of taxes paid on employer-sponsored and individual investment accounts.
  5. Managing Wealth

    3 Money Market Funds for High Net Worth Investors (VMSXX, PTEXX)

    Explore analyses of three tax-exempt money market funds that may be suitable for high net worth investors, and learn about the characteristics of these funds.
  6. Markets

    Feeling Taxed? What You Need to Know about Munis

    Find out why investors have any number of reasons to feel stressed, now that tax time is coming.
  7. Investing

    Municipal Bonds Offer Something More for Everyone

    Are municipal bonds really for me? The popular perception is that tax-exempt income only benefits those investors in the highest tax brackets.
  8. ETFs & Mutual Funds

    The Top 5 Municipal Bond Funds for 2016

    Understand how the addition of municipal bond mutual funds can enhance a portfolio, and learn the top-rated municipal bond funds to consider for 2016.
  9. ETFs & Mutual Funds

    4 Tax-Free Muni Bond ETFs to Consider

    Tax free municipal bond ETFs are an excellent way to build wealth slowly. Here are 4 you should consider.
  10. Managing Wealth

    Investment Tax Basics For All Investors

    Nothing can be said to be certain, except death and taxes even in your investments.
RELATED FAQS
  1. How are municipal bonds taxed?

    Discover information about trading municipal bonds, specifically the various tax implications municipal bonds have at state ... Read Answer >>
  2. Why should I keep records on my tax-exempt bond transactions?

    Keep your purchase records on all investments, including tax-exempt bonds. Though the interest is tax-free, you may owe taxes ... Read Answer >>
  3. Dennis, a resident of Pennsylvania, bought a U.S. Treasury Bond which pays 7% interest ...

    The correct answer is d) The interest from U.S. Treasury Bonds is exempt from state and local taxes, however; it is subject ... Read Answer >>
  4. Where can I buy government bonds?

    The type of bond determines where you can purchase it, so you need to decide which type of bond you would like to purchase ... Read Answer >>
  5. How can I find tax-exempt mutual funds?

    Learn about finding tax-free mutual funds at major investment firms, including how tax-free funds work and what you should ... Read Answer >>
  6. What is the difference between municipal bonds and standard money market funds?

    The primary difference between municipal bonds - also known as "munis" - and money market funds is that municipal bonds are ... Read Answer >>
Hot Definitions
  1. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  2. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  3. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  4. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  5. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
  6. Weighted Average Life - WAL

    The average number of years for which each dollar of unpaid principal on a loan or mortgage remains outstanding. Once calculated, ...
Trading Center