10th Brigade Engineer Battalion (10BEB) Board Practice Exam

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A taxpayer receives $1,200 of interest from bonds issued by a state government for a public project. How is the interest generally treated for federal income tax purposes?

Excluded from federal gross income Taxed as ordinary interest income Taxed as a long-term capital gain Subject to self-employment tax

Correct Answer:

Excluded from federal gross income

Explanation:

Interest on qualifying obligations of a state or political subdivision is generally exempt from federal income tax, although special rules can apply to certain private activity bonds.

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