Municipal bonds, aka munis, are the main type of tax-exempt bonds.
Munis are issued by states, counties, cities, and other government agencies to fund major capital projects, such as building schools, hospitals, highways, and other public buildings.
Interest income from muni bonds is generally not subject to federal income taxes. It can also be exempt from state or local income taxes if your home state or city issues the bond. Interest income from muni bonds issued by another state or city is taxable on your state or local income tax return.
Fast fact: Muni bonds exempt from federal, state, and local taxes are known as triple tax exempt.
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Investment income can be taxed as ordinary income or at special rates, depending on the type it is.
Capital gains and some dividends receive preferential tax rates. Interest and annuity payouts are taxed as ordinary income.
All investments earn income tax-free while they remain in tax-advantaged accounts.
You probably know that you have to pay taxes on just about all your income. But while the taxes on your work income is fairly straightforward based on your tax bracket, and often automatically withheld from your paycheck the tax on investment income can be more complex.
Not all investment income is taxed equally.