Investment Company and Variable Contracts Products Representative (Series 6)Practice Exam

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How is interest income from Treasuries treated for tax purposes?

Fully taxable at local level
Exempt from federal tax
Taxed only at the state level
Taxed at the federal level only

The correct answer is: Taxed at the federal level only

Interest income from U.S. Treasuries is subject to federal income tax; however, it is exempt from state and local taxes. This means that investors must report the interest they earn from these government securities on their federal tax returns, and it will be taxed at the federal level according to their applicable tax rate. The nature of Treasuries as a government-backed investment results in this unique tax treatment, where the income they generate is treated less favorably at the state level, providing some tax advantages to the investor. Therefore, while the interest is taxed federally, it is not subject to state or local taxation, making the treatment at the federal level the correct response.