If a customer in Utah owns bonds issued by Puerto Rico, what is the tax status of the bond interest?

The correct choice reflects the unique tax treatment of bonds issued by Puerto Rico for U.S. citizens. When individuals hold bonds issued by Puerto Rico, the interest earned on these bonds is generally exempt from federal income tax. Additionally, for residents of Puerto Rico, the interest is also exempt from Puerto Rico taxes.

Though it’s important to note that the tax exemption does not automatically extend to all U.S. states uniformly; specifically, for U.S. citizens who are not residents of Puerto Rico, there can be different implications depending on the state tax laws. In the case of the customer from Utah, while the interest may be free from federal taxes, Utah may choose to tax that interest at the state level. Therefore, while option C touches on the tax-free nature of Puerto Rican bonds at the federal level, it oversimplifies the implications for state taxes, particularly for non-residents.

The complexity surrounding state tax treatment is crucial to understanding this topic, as it helps clarify why not all U.S. citizens will experience the same tax consequences based on their state of residency in relation to Puerto Rican bonds.