Everybody likes getting something for free, and taxes are no different. Investing in securities like municipal bonds (munis) or municipal bond funds generates tax-free interest income. Here is what you need to know.
Advantages of municipal bonds
You pay zero federal tax on municipal bond investment income. This makes municipal bonds more attractive than many comparable taxable investments. A municipal bond paying 6 percent to an investor in the 24 percent tax bracket is actually a better investment than a taxable bond paying interest at 7.9 percent, due to the federal income tax break.
What's more, municipal bond income isn't counted for net investment income tax purposes. So if you are subject to this 3.8 percent surtax, municipal bonds provide an additional tax break to you. And, if the bond is issued by an authority within the state where you reside, it's also exempt from any state income tax.
For these reasons, municipal bonds are a popular investment, especially among retirees, because they are often stable and most bonds carry a relatively low risk.
Potential tax consequences
But that doesn't mean there are no potential downsides to municipal bonds.
Investing in municipal bonds can provide tax-free, stable income, but you need to understand how the investments fit with your situation to maximize the tax savings.
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The tax information contained in this site is of a general nature and should not be acted upon in your specific situation without further details and/or professional assistance.
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