Which of the following is NOT included in taxable interest income?

Which of the following is NOT included in taxable interest income?

• A. Interest from municipal mutual funds
• B. Interest from bank accounts
• C. Interest from US Treasury Bills
• D. Interest from insurance dividends

Answer: (A)

Interest income is generally taxable, but there are specific types of interest that are exempt from federal income tax. Interest from municipal mutual funds is one such category. This type of interest is derived from investments in municipal bonds, which are issued by states and local governments to fund public projects and are typically exempt from federal (and sometimes state) income taxes. This exemption makes interest from municipal mutual funds not included in taxable interest income, while interest from bank accounts, US Treasury Bills, and insurance dividends are considered taxable. Bank account interest is taxable as ordinary income, US Treasury Bills are subject to federal tax because they are issued by the government, and insurance dividends can also be taxable depending on the circumstances. Therefore, the correct choice reflects that interest from municipal mutual funds does not contribute to taxable interest income, distinguishing it from other forms of interest that are subject to tax.

Interest income is generally taxable, but there are specific types of interest that are exempt from federal income tax. Interest from municipal mutual funds is one such category. This type of interest is derived from investments in municipal bonds, which are issued by states and local governments to fund public projects and are typically exempt from federal (and sometimes state) income taxes.

This exemption makes interest from municipal mutual funds not included in taxable interest income, while interest from bank accounts, US Treasury Bills, and insurance dividends are considered taxable. Bank account interest is taxable as ordinary income, US Treasury Bills are subject to federal tax because they are issued by the government, and insurance dividends can also be taxable depending on the circumstances.

Therefore, the correct choice reflects that interest from municipal mutual funds does not contribute to taxable interest income, distinguishing it from other forms of interest that are subject to tax.