What term refers to investment returns that are exempt from federal and state taxes?

The term that refers to investment returns that are exempt from federal and state taxes is "Tax-Free Earnings." These types of returns are often associated with specific investment vehicles, such as municipal bonds, which can provide tax-exempt interest income to investors. This characteristic makes tax-free earnings particularly attractive to individuals in higher tax brackets, as they can avoid the burden of taxation on the growth of their investments.

Understanding tax-free earnings is essential for financial planning and investment strategy, as they can influence decisions on asset allocation and portfolio management. They provide a significant advantage by enabling investors to retain more of their income, thus maximizing their overall return on investment. This distinction underlines the importance of tax considerations in municipal finance and the preferences of investors when selecting investment options.