Who benefits from non-taxable interest related to bonds?

Non-taxable interest related to bonds primarily benefits state and political subdivisions. This non-taxable status often applies to municipal bonds, which are issued by these governmental entities to fund public projects such as infrastructure, schools, and hospitals. The interest earned on these bonds is generally exempt from federal income tax, and in some cases, state and local taxes as well.

This feature makes munis particularly attractive to investors in higher tax brackets as they can earn interest without paying taxes on that income, effectively increasing their return compared to taxable investments. Thus, state and political subdivisions are the clear beneficiaries as they can secure financing at lower effective interest rates compared to what they might have to pay if the interest were taxable.