Exempt income

Exempt income is earnings from certain types of investments that is not subject to taxation. Examples of exempt income are:

  • Academic scholarships

  • Certain types of death benefits

  • Gifts under a certain threshold level

  • Interest on municipal bonds

  • Roth IRA distributions

Because the interest on municipal bonds is exempt from taxation, this feature tends to drive up the market price of municipal bonds, thereby reducing the effective interest rate that can be earned on them.