Types of income that may be tax-exempt include interest income from U.S. Treasury securities (which is exempt at the state and local levels), interest from municipal bonds (which is potentially exempt at the federal, state and local levels) and capital gains that are offset by capital losses. Types of income that may be taxed at lower rates include qualified dividends and long-term capital gains. Social Security income is sometimes taxable, depending on how much other income the taxpayer receives during the year.