What is an example of tax-exempt interest?

Tax-exempt interest refers to earnings from certain types of bonds or investments that are not subject to federal income tax. An example of this is interest earned on state bonds, commonly known as municipal bonds. These bonds are issued by state and local governments to fund public projects, and in many cases, the interest income generated is exempt from federal taxation, and sometimes even state taxes for residents.

This characteristic makes municipal bonds an attractive investment for individuals in higher tax brackets, as they can receive interest income without the burden of taxation, enhancing their overall return. Other types of interest, such as that from savings accounts, credit card debt, or personal loans, do not fall under this category because they are typically taxable or not considered as investment income that qualifies for tax exemption.