Question

Which of the following is false in relation to U.S. savings bonds? Interest earned is always received on a tax-free basis at the federal level. U.S. savings bonds should not be used to hold the majority of a person’s emergency fund assets. Interest earned is received on a tax-free basis at the state level. Interest earned is received on a tax-free basis at both the federal and state levels.

Answer 1

US saving bonds are financial instruments that can be used by the individuals to undertake financial saving.

US saving bonds can either pay fixed interest rate or inflation indexed interest rate.

The interest earned on the US saving bonds is subject to tax at federal level.

In other words, federal income tax has to be paid on interest earned on US saving bonds.

However, such interest is exempt from the state or local income tax.

So,

Interest earned is always received on a tax free basis at the federal level is an incorrect assertion with respect to US saving bonds.

Hence, the correct answer is the option (a) [Interest earned is always received on a tax-free basis at the federal level].