Final answer:
While municipal bond interest is usually tax-exempt, it may be subject to tax under conditions such as sale at a profit or the AMT. Itemized deductions may include a variety of eligible expenses exceeding the standard deduction. Taxable income is determined after subtracting deductions and exemptions from the adjusted gross income.
Step-by-step explanation:
Interest from municipal bonds is generally exempt from federal income taxes, and often from state and local taxes if you live in the state where the bond is issued. However, there are certain conditions under which municipal bond interest may be subject to tax. For example, if you purchased the bond at a discount and sold or redeemed it at a profit, the profit may be subject to capital gains tax. Additionally, if you own a bond that is subject to the federal Alternative Minimum Tax (AMT), interest from private activity bonds may be taxable.
Itemized deductions of $30,000 could come from various expenses that taxpayers are allowed to deduct from their adjusted gross income. These can include payments for mortgage interest, property taxes, state and local taxes, medical expenses, and charitable donations. Taxpayers have the choice to either itemize deductions if their total deductions exceed the standard deduction amount for their filing status or take the standard deduction.
The taxable income equation you've referenced, taxable income = adjusted gross income - (deductions and exemptions), accurately reflects how the taxable income is determined. Taxable income is what you are ultimately taxed on, and it is crucial to understand that the nature and source of income, as well as the deductions you are eligible to claim, play a significant role in calculating your tax liability.