Some investments are tax exempt, which means you don't have to pay income tax on the earnings they produce.
For example, the interest you receive on a municipal bond is generally exempt from federal income tax, and also exempt from state and local income tax if you live in the state where the bond was issued.
However, if you sell the bond before maturity, any capital gain is taxable.
Similarly, dividends on bond mutual funds that invest in municipal bonds are exempt from federal income tax. And for residents of the issuing state for single-state funds, the dividends are also exempt from state and local taxes.
Capital gains on these funds are never tax exempt.
Earnings in a Roth IRA are tax exempt when you withdraw them, provided your account has been open for five years or more and you're at least 59 1/2 years old. And earnings in 529 college savings plans and Coverdell education savings accounts (ESAs) are also tax exempt if the money is used to pay qualified education expenses.
When an organization such as a religious, educational, or charitable institution, or other not-for-profit group, is tax-exempt, it does not owe tax of any kind to federal, state, and local governments. In addition, you can take an income tax deduction for gifts you make to such organizations.
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