What tax benefits do owners of municipal bonds receive if they live in the state where the bonds are issued?

Owners of municipal bonds often enjoy significant tax benefits, particularly if they reside in the state where the bonds are issued. Specifically, interest income from municipal bonds is typically exempt from federal income tax. Additionally, many states also exempt this interest from state income tax. If a bondholder is a resident of the state issuing the bonds, they may also be exempt from local taxes on the interest earned.

This means that the correct choice highlights the double layer of tax exemption – both at the state and local levels – reinforcing the attractiveness of these investment vehicles for residents. This is especially beneficial for individuals in higher tax brackets, as it can lead to substantial savings compared to taxable investments. The combined state and local tax-free status makes municipal bonds a particularly appealing investment for those looking to optimize tax efficiency and retain more of their income.