All About Tax-Exempt Muni-Bonds

A common way for states and localities to supply needed capital facilities, such as buildings, roads, and libraries, is to finance them. Instead of competing with nongovernmental borrowers, most choose to use a special governmental advantage, issuing bonds whose interest payments are exempt from federal income tax. The tax code, under I.R.C. § 103(a), allows interest income paid to the owner of a tax-exempt security (i.e., a state or local bond) to be excluded from the owner's income when determining gross income for federal income tax purposes. 

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