DEFINITION of 'Triple-Tax-Free'

An investment (usually a municipal bond) featuring interest payments that are exempt from taxes at the municipal, state and federal levels. Also known as "triple tax-exempt".

BREAKING DOWN 'Triple-Tax-Free'

Municipal bonds often offer triple-tax-free interest payments to investors because the U.S. Constitution forbids the federal government from taxing interest earned on loans to municipalities and states. The state or municipality issuing the bonds makes the bonds tax-free to encourage investment, and the remaining state or municipality offers tax-free status to the issuer at its particular level of government as a courtesy.

However, tax-free status on earnings comes at a price to investors, as these bonds usually offer lower returns. This may or may not be made up to bondholders depending on the amount of income tax they pay: higher income earners will gain more from tax-free investments than lower income earners.

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