A taxpayer can exclude from income interest received from:
a a savingsaccount established at a local bank
b. a credit union
c. a seller-financed mortgage transaction
d. municipal bonds issued by the state.
To determine which option(s) allow a taxpayer to exclude interest received from income, we can break down each option one by one:
a) A savings account established at a local bank:
To determine if interest received from a savings account is taxable or eligible for exclusion, we need to consider the type of savings account. Traditional savings accounts typically generate taxable interest, while certain special types of savings accounts, like tax-exempt municipal bond savings accounts or Health Savings Accounts (HSAs), may offer tax advantages. However, based on the given options, it is not clear if the savings account mentioned falls under the category of special types of accounts. Therefore, interest received from a savings account established at a local bank should generally be considered taxable unless it falls under specific circumstances where exclusions may apply, such as the ones mentioned above.
b) A credit union:
Interest received from a credit union is treated similarly to interest received from a savings account at a local bank. In most cases, interest received from a credit union would be considered taxable unless it falls under specific categories of tax-exempt or tax-advantaged accounts like those mentioned earlier.
c) A seller-financed mortgage transaction:
Interest received from a seller-financed mortgage transaction is generally treated as taxable income. This interest gained from the mortgage transaction is not eligible for exclusion unless other specific provisions of the tax code apply, and those would depend on the circumstances of the transaction, such as the property being used for personal residence, specific loan terms, or other factors. In most cases, however, interest received from a seller-financed mortgage transaction is taxable.
d) Municipal bonds issued by the state:
Interest received from municipal bonds is usually exempt from federal income tax. Municipal bonds are debt securities issued by state and local governments to finance public projects. The interest they pay is generally exempt from federal income taxation, but there can be exceptions based on the specific bond or the state in which it is issued. However, it is important to note that while interest from municipal bonds may be tax-exempt on the federal level, it still may be subject to state or local taxes.
In summary, based on the given options, the interest received from municipal bonds issued by the state (option d) is the most likely choice that would allow a taxpayer to exclude interest from income. However, it is essential to consult with a tax professional or refer to the Internal Revenue Service (IRS) guidelines for specific and up-to-date information regarding the tax treatment of interest income.