Treasury issues are:
Multiple Choice
a) Exempt from state income taxes but, not federal income taxes.
b) Exempt from federal income taxes but, not state income taxes.
c) Have large amounts of default risk.
d) Securities that the U.S. government issues for periods up to 50 years.
e) Dependent on whether the treasury can obtain money to make payments.
The Correct Answer and Explanation is :
The correct answer is:
a) Exempt from state income taxes but, not federal income taxes.
Explanation:
Treasury securities are debt instruments issued by the U.S. Department of the Treasury to finance government spending and obligations. These include Treasury bills (T-bills), Treasury notes (T-notes), and Treasury bonds (T-bonds). They are considered among the safest investments available because they are backed by the full faith and credit of the U.S. government.
One of the key benefits of Treasury securities is that they are exempt from state and local taxes. This means that, while interest income earned from Treasury securities is subject to federal income taxes, it is not subject to state or local income taxes. This is why investors often find Treasury securities attractive, especially in states with high state income tax rates. The exemption from state taxes is a significant advantage for individuals who reside in these states, making Treasury securities more favorable compared to other taxable investment options.
It is important to note that Treasury securities are not exempt from federal income taxes, meaning the interest earned on them must still be reported and taxed by the Internal Revenue Service (IRS). However, the tax treatment makes them particularly advantageous for certain types of investors, particularly those in high-tax states, and helps ensure that they remain a popular choice for conservative investors seeking low-risk, tax-efficient investment options.
Additionally, Treasury securities are highly liquid and do not carry significant default risk because they are backed by the U.S. government. The government can raise funds through taxation and borrowing, making it unlikely that Treasury securities will default.