What is generally not considered taxable income?

Interest from municipal bonds is generally not considered taxable income at the federal level, which is why it is recognized as the correct answer. The key aspect of municipal bond interest is that it is issued by state and local governments to fund public projects. Investors receive the interest from these bonds tax-free, creating an attractive option for those looking to strategically manage their tax liabilities.

This tax-exempt status at the federal level means that individuals do not need to report this interest as income on their federal tax returns, which distinguishes it from other types of income such as wages, bonuses, and even Social Security benefits, which can be taxable under certain circumstances. Understanding the nature of municipal bonds and their tax implications is essential for tax planning and can influence investment decisions significantly.