Investment VehiclesQuestion 25 of 110
Interest paid on most general obligation municipal bonds is generally treated how for federal tax purposes?
a.Exempt from federal income tax
b.Fully taxable as ordinary income at the federal level
c.Taxed at the long-term capital gains rate
d.Subject to a mandatory 20% federal withholding
Explanation
Interest on most municipal bonds is exempt from federal income tax, which makes them attractive to investors in higher tax brackets. This tax advantage means municipal yields are often compared on a taxable-equivalent basis. Capital gains on munis, however, can still be taxable.
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