7668 / Is interest on municipal bonds tax-exempt if payment is guaranteed by the United States or corporations established under federal law?

Generally, an obligation issued after 1983 is federally guaranteed if payment of principal or interest (in whole or in part, directly or indirectly) is guaranteed by: the United States, any U.S. agency, or, under regulations to be prescribed, any entity with authority to borrow from the United States (the District of Columbia and U.S. possessions are usually excepted); or if proceeds of the issue are to be used in making loans so guaranteed.²

Exceptions to this rule include certain bonds guaranteed by the Federal Housing Administration, the Department of Veterans Affairs, the Federal National Mortgage Association, the Federal Home Loan Mortgage Corporation, the Government National Mortgage Association, and the Student Loan Marketing Association. Some housing program obligations and qualified mortgage bonds and veterans’ mortgage bonds are also excepted, provided proceeds are not invested in federally insured deposits or accounts. Bonds issued or guaranteed by Connie Lee Insurance Company are not considered “federally guaranteed.”³

Some state and local obligations are secured by certificates of deposit federally insured by the Savings Association Insurance Fund (SAIF–formerly the Federal Savings and Loan Insurance Corporation (FSLIC)) or the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per bondholder. Bonds issued after April 14, 1983, other than any obligations issued pursuant to a binding contract in effect on March 4, 1983, are denied tax-exempt status if 5 percent or more of the proceeds of the issue is to be invested in federally insured deposits or accounts.⁴