Answer Key with Explanations [1] Gary and Gladys invest in bonds. In the current year, they received the following interest: California general revenue bonds New York City sanitation fund bonds Seattle School District bonds AT&T 20-year bonds $ 800 1,000 400 600 The state and local bonds are neither private activity bonds nor arbitrage bonds. How much interest income may Gary and Gladys exclude from gross income on their joint retum? A. SO B. $800 C. $1,800 D. $2,200 The correct answer is D. A. Gary and Gladys may exclude state and municipal interest income on their joint return. B. Interest on obligations of any municipality is also excluded from gross income. C. Interest from all municipal (local) bonds is excluded from gross income. D. Under Sec. 103, gross income does not include interest on obligations of a state or any political subdivision thereof. The use of the proceeds of the bonds does not ordinarily change the taxation of the interest (although special rules apply in the case of private activity bonds and arbitrage bonds). Therefore, Gary and Gladys may exclude the interest from all the state and local bonds (as listed below) but must include the $600 of interest from the AT&T bonds in gross income. California general revenue bonds New York City sanitation fund bonds Seattle School District bonds Total excluded interest $ 800 1000 400 $2200