What does tax-exempt mean?

Tax-exempt refers to income that is not subject to taxation. This means that certain types of income, such as municipal bond interest, certain trust funds, and specific nonprofit organization revenues, are not included in taxable income and do not require payment of federal income taxes. The concept of tax-exempt status is vital in understanding the differences between various forms of income and how they are treated under tax laws.

The other options describe different taxation scenarios that do not accurately define tax-exempt income. For example, income subject to a lower tax rate or partially taxed income still incurs some level of taxation, which is not consistent with the definition of tax-exempt income. Income generated from non-profitable activities may suggest a lack of profit but does not specifically convey the same meaning as tax-exempt, which strictly relates to taxation status.