Municipal Bond Interest

Most of the time, when you invest in bonds, you have to pay federal and state taxes on the income you receive from them. One exception is municipal bonds, issued by states and other government entities. Their income is generally tax-free on the federal level and also at the state and local level if you live in the state where the bonds were issued.14

This tax exemption applies whether you invest in individual municipal bonds or buy them through a municipal bond fund or ETF. Interest income from U.S. Treasury bills, notes, and bonds is subject to federal income tax but exempt from state and local income taxes.14

Internal Revenue Service. "Publication 4079, Tax-Exempt Governmental Bonds," Page 2.

Municipal bonds often pay less than other types of bonds. But, depending on your tax bracket, they may offer a better after-tax return than their taxable counterparts.