Which of the following describes tax-exempt interest?

Tax-exempt interest refers specifically to income from certain sources that is not subject to federal income tax. One of the main types of tax-exempt interest is the interest earned from municipal bonds. Municipal bonds are securities issued by local governments or their agencies, and they are often used to fund public projects. The interest income generated from these bonds is typically exempt from federal taxes, and in many cases, it may also be exempt from state and local taxes if the bondholder resides in the issuing state.

This characteristic makes municipal bonds attractive to investors looking for tax-advantaged options for generating income. By understanding that interest from municipal bonds is tax-exempt, individuals can better discuss investing strategies that align with their financial and tax planning goals. Other types of interest, such as that from personal loans, insurance policies, or business accounts, do not share this tax-exempt status and are generally subject to taxation.