Local Municipalities

Definition

A municipality is a city, town, village or similar local government incorporated under state law; federal law does not create or define it. Interest on bonds issued by a state or a political subdivision such as a municipality is generally excluded from federal gross income, which lets municipalities borrow at tax-exempt rates, though bonds whose proceeds go more than 10 percent to private business use lose that exclusion unless they are qualified bonds.^[1][2]

Federal law

Formed under state law. No Act of Congress creates it; the federal laws below apply to it as described.

1. Tax Reform Act of 1986, Pub. L. 99-514, § 1301, 100 Stat. 2602. Federal tax treatment of municipal bonds: excludes interest on state and local bonds from gross income and sets the private activity bond tests (26 U.S.C. §§ 103, 141); does not create municipalities. Official text: govinfo.gov, U.S. Government Publishing Office.

Federal regulations

Rules issued by federal agencies under the laws above.

2. Interest upon obligations of a State, territory, etc. (definition of political subdivision), 26 CFR 1.103-1 (Internal Revenue Service, Department of the Treasury). Treasury definition of "political subdivision" for tax-exempt bond interest, which includes municipal corporations. Official text: govinfo.gov, U.S. Government Publishing Office.