When a taxpayer borrows money and invests the loan proceeds in municipal bonds, the interest paid by the taxpayer on the debt will not be deductible.

Question

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According to the IRS, interest on a loan used to purchase tax-exempt municipal bonds is not deductible because the income generated from municipal bonds is already tax-free. Therefore, taxpayers cannot claim a deduction for interest paid on a loan used to purchase these bonds.

When a Taxpayer Borrows Money and Invests the Loan Proceeds