which categories of income are tax exempt 
federal state and local tax laws specify certain categories of income that are not subject to income taxation generally interest paid on state and local government bonds is exempt from federal income tax federal law also exempts interest paid on some special narrow categories of federal agency debt state tax laws exempt interest on u s treasury bonds and some states also exempt interest on state and local bonds in addition distributions from roth 401 k plans and roth individual retirement accounts iras are tax free charities and other tax exempt organizations do not pay tax on their income except for income from unrelated trades or businesses 