An investor residing in Illinois, currently in a federal marginal income tax bracket and a state income tax bracket, purchases two fixed-income securities: an out-of-state municipal revenue bond paying a annual coupon and a U.S. Treasury note paying a annual coupon. Which of the following statements accurately describes the tax treatment of the interest income generated by these securities for this investor?
- The interest from the municipal revenue bond is exempt from federal income tax but subject to state income tax, while the interest from the U.S. Treasury note is subject to federal income tax but exempt from state income tax.Cevap
- BThe interest from both the municipal revenue bond and the U.S. Treasury note is exempt from state income tax, but only the U.S. Treasury note interest is exempt from federal income tax.
- CThe interest from the municipal revenue bond is completely tax-free at both federal and state levels regardless of the issuing state, while the U.S. Treasury note interest is fully taxable at both levels.
- DThe interest from both securities is subject to federal income tax, but the out-of-state municipal revenue bond interest is exempt from state income tax due to federal reciprocity agreements.
Cevap
The interest from the municipal revenue bond is exempt from federal income tax but subject to state income tax, while the interest from the U.S. Treasury note is subject to federal income tax but exempt from state income tax.
Interest earned on municipal bonds is exempt from federal income tax, but out-of-state municipal interest is subject to state income tax in the investor's home state. In contrast, interest earned on U.S. Treasury securities is subject to federal income tax but exempt from all state and local income taxation.
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Taxation rules for Municipal Debt vs. U.S. Treasury Securities
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