What is Tax Exempt Interest?
Tax-exempt interest is income earned from certain types of bonds that is not subject to federal income tax. The most common sources of tax-exempt interest are municipal bonds, which are issued by state and local governments. Here’s a bit more detail: 1. **Municipal Bonds**: These are bonds issued by states, cities, counties, or other local government entities. The interest earned on these bonds is generally exempt from federal income tax. Additionally, if you live in the state where the bond is issued, the interest may also be exempt from state and local taxes. 2. **Private Activity Bonds**: Some municipal bonds, known as private activity bonds, may be subject to the Alternative Minimum Tax (AMT), even though they are otherwise tax-exempt. 3. **Reporting**: Even though tax-exempt interest is not subject to federal income tax, it must still be reported on your federal tax return. You’ll typically receive a Form 1099-INT from the issuer, which will indicate the amount of tax-exempt interest you earned. This is reported on Line 2a of Form 1040. 4. **Impact on Other Tax Calculations**: While tax-exempt interest does not count as taxable income, it can affect other tax calculations. For example, it is included in the calculation of your modified adjusted gross income (MAGI), which can impact the taxation of Social Security benefits and eligibility for certain tax credits and deductions. Understanding tax-exempt interest can
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