Tax-exempt Interest Income

What is tax-exempt interest income?

Tax-exempt interest income is any form of interest that was received and credited to an account. You are able to withdraw without penalties during the year it was available. It is also not subject to federal and state tax.

Municipal Bonds

Tax-exempt interest income is income earned from municipal bonds. Municipal bonds issued by states, cities, or counties and the District of Columbia are tax-free investments. States collect income tax and exempt income earned from bonds sold by cities within their jurisdiction.

Interest on insurance dividends left with the Department of Veteran Affairs and some savings bonds are other examples of tax-exempt interest income. Therefore, if you receive interest income from the Treasury, is subject to federal tax but exempt from state and local taxes.

Mutual Funds

Tax-free Mutual Funds consist of ordinary dividends, capital gains and non-dividend distributions, and undistributed capital gains interest. Most importantly, do not include interest earned on your IRA, Health Saving Account, Archer or Medical Advantage MSA or Coverdell education savings account.

However, even if you didn’t receive the Forms 1099-INT or 1099-OID,  you must report all taxable and tax-exempt interest on your tax return.

Here are some examples of taxable interest.
  • 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
  • Other Interest from businesses

Read more about taxable interest income here.

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