Series 7 Exam Question 321: Answer and Explanation

Question: 321

Larry Eagle is a resident of Michigan. Mr. Eagle purchased a Michigan municipal bond. What is the tax treatment of the interest that Larry earns on his Michigan bond?

I. It is exempt from local taxes.

II. It is exempt from state taxes.

III. It is exempt from federal taxes.

• A. III only
• B. I and III
• C. II and III
• D. I, II, and III

Correct Answer: D

Explanation:

D. When you purchase a municipal bond issued within your home state, the interest you receive is triple tax-free (exempt from federal, state, and local taxes). In addition, if you purchase a bond issued by a U.S. territory (such as Puerto Rico, U.S. Virgin Islands, Guam, Samoa, and Washington, D.C.), the interest is triple-tax free. However, if you purchase a bond issued by another state, the interest is exempt from federal taxes only.