What is Tax-Exempt Interest?
Tax-Exempt Interest Example
For example, let's assume that John Doe purchases a municipal bond. The bond pays 5% interest per year, or $50 for every $1,000 John Doe invests. That $50 is income to John, which is normally taxable. However, because municipal bonds are tax-free securities, John's interest is tax-exempt.
Taxpayers are required to report the amount of tax-exempt interest they receive on Form 1040 or Form 1040A. Borrowers that pay more than $10 of tax-exempt interest must report those payments to the IRS and the lenders via Form 1099-INT.
In some cases, the amount of tax-exempt interest aearns can limit the taxpayer's qualification for certain other tax breaks.
Why Tax-Exempt Interest Matters
One of the largest advantages of investing in is that the interest is usually exempt from federal and is also exempt from most state and local if the investor lives in the state or municipality issuing the debt (capital gains on are taxable, however). Although investors subject to the alternative minimum tax may be required to pay on interest, tax-exempt interest means that many investors in high federal-tax brackets particularly benefit from investing in .
The lower yields associated withthat pay tax-exempt interest also provide borrowers with borrowing rates that may be more attractive than what is available through other means. This in turn encourages the local governments to undertake new projects.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
Usually it's easy to tell if you've stumbled upon a good idea at the office; your boss gives you positive feedback in the form of either an "atta boy" or maybe even a raise. ...Read More →
A money crisis can occur in the blink of an eye – and most aren’t predictable. COVID-19 is a perfect example of an unforeseen circumstance that caused massive personal finance issues for...Read More →