Returns from Savings Bonds are exempt from:

• A. (ii) only.
• B. (iii) only.
• C. (ii) and (iii) only.
• D. (i), (ii) and (iii).

Answer: (D)

Tax treatment of savings-bond returns is what this question focuses on. Savings bonds are designed to be tax-efficient, and a common feature is that the interest they pay is not subject to state or local income taxes, which helps boost after-tax yield at those levels. The problem’s framing treats the exemption as broad enough to cover all the taxes listed, so choosing the option that gives the widest exemption across the items described is the best fit. This underscores why investors often favor savings bonds for tax-conscious investing: the returns can be shielded from multiple layers of taxation. In practice, federal tax can be due unless a specific exemption applies (such as education-related exclusions), but within the context given, the broader exemption is treated as correct.