Tax-Exempt Interest

DEFINITION of 'Tax-Exempt Interest'

Interest income that is not subject to federal income tax. Tax-exempt interest can be somewhat of a misnomer as it may still be taxed at the state or local levels. It may also be subject to the alternative minimum tax. Furthermore, capital gains on tax-exempt investments are still taxable; only the interest on these investments is tax-exempt. Tax-exempt interest is reported to both taxpayers and the IRS on form 1099-INT. Taxpayers, in turn, must report this tax-exempt interest on form 1040.

INVESTOPEDIA EXPLAINS 'Tax-Exempt Interest'

The most common way for interest to be tax-exempt at the state and local levels in addition to the federal level is for an investor to purchase a municipal bond issued in his or her state or locality of residence. Municipal bonds are one of the most common types of investments that pay tax-exempt interest, but interest may only be tax-exempt at the federal level if, for example, a California resident buys a New York municipal bond. These tax laws, however, vary by state. Treasury securities issued by the U.S. government pay interest that is tax exempt at the state and local levels, but not the federal level.

RELATED TERMS
  1. Double Exempt

    The status accorded to municipal bonds for which interest is ...
  2. Municipal Bond

    A debt security issued by a state, municipality or county to ...
  3. Tax Shelter

    A legal method of minimizing or decreasing an investor's taxable ...
  4. Tax Shield

    A reduction in taxable income for an individual or corporation ...
  5. Tax Exempt

    To be free from, or not subject to, taxation by regulators or ...
  6. Surrender Period

    The amount of time an investor must wait until he or she can ...
Related Articles
  1. Avoid The Social Security Tax Trap
    Taxes

    Avoid The Social Security Tax Trap

  2. Get A Short-Term Advantage In The Money ...
    Personal Finance

    Get A Short-Term Advantage In The Money ...

  3. The Bear On Bonds
    Home & Auto

    The Bear On Bonds

  4. What causes a bond's price to rise?
    Bonds & Fixed Income

    What causes a bond's price to rise?

Hot Definitions
  1. Conduit Issuer

    An organization, usually a government agency, that issues municipal securities to raise capital for revenue-generating projects ...
  2. Financing Entity

    The party in a financing arrangement that provides money, property, or another asset to an intermediate entity or financed ...
  3. Hyperinflation

    Extremely rapid or out of control inflation. There is no precise numerical definition to hyperinflation. Hyperinflation is ...
  4. Gross Rate Of Return

    The total rate of return on an investment before the deduction of any fees or expenses. The gross rate of return is quoted ...
  5. Debit Spread

    Two options with different market prices that an investor trades on the same underlying security. The higher priced option ...
  6. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...