Tax Exempt Income is any form of interest you received that was credited to an account and you are able to withdraw without penalties during the year it was available, not subject to federal and state tax.
Tax-exempt interest income is earned from municipal bonds issued by states, cities, or counties and the District of Columbia. Municipal bonds are tax-free investments. Many states collect income tax and also exempt income earned from bonds sold by cities within their jurisdiction.
Other examples of tax-exempt interest income include interest on insurance dividends left with the Department of Veteran Affairs and some savings bonds. Interest income received from the Treasury is subject to federal tax but is exempted from state and local taxes.
Tax-free Mutual Funds consist of ordinary dividends, capital gains and non-dividend distributions, and undistributed capital gains interest.
Do not include interest earned on your IRA, Health Saving Account, Archer or Medical Advantage MSA or Coverdell education savings account.
Interest is taxable and nontaxable. Taxable interest is received on Forms 1099-INT or 1099-OID and you must report all taxable and tax-exempt interest on your tax return even if you didn’t receive the forms. Interest on a bank account, money market accounts, certificates of deposits, corporate bonds and deposited dividends including distributions, Treasury bills, notes and bonds, Savings Bond Interest and Other Interest from businesses are examples of taxable interest.
Read more about taxable interest income here.