A municipal bond, also known as a muni, is debt security used to fund capital expenditures for a county, municipality, or state. Municipal bonds are commonly tax-free at the federal level but can be taxable at state or local income tax levels or under certain circumstances.
Who benefits the most from municipal bonds?
On the positive side, residents of states without income taxes can buy muni bonds from any state and remain 100% tax-free. 1 Progressive taxes mean that rates usually increase with income, so higher-income individuals benefit more from muni bond tax exemptions.
Which taxpayer would benefit the most from a tax-free municipal bond compared to a taxable bond?
In the normal course of events, investors accept a lower coupon rate on tax-free munis than on similar taxable bonds. In general, high tax-bracket investors prefer tax-exempts, while those in lower tax brackets or with assets in tax-advantaged retirement accounts like 401(k)s prefer higher yielding taxable bonds.
Do you have to pay state tax on Munis?
Florida, Texas and Washington don’t have state income taxes, so there’s no spread. Investors in various states would have to earn higher yields on out-of-state munis to make up for a lack of state income tax breaks. Source: Bloomberg, as of 10/30/2020 and the Tax Foundation for state tax rates, as of 02/04/2020.
Is the interest on a municipal bond tax free?
Municipal bonds, sometimes referred to as munis, are issued by various government entities such as states, counties and municipalities. The income from these bond funds is typically exempt from federal taxes and, if issued within your state, the interest will also be free of state income taxes.
When to choose Munis from outside your home state?
Therefore it may make more sense if you’re in a high-income-tax state to buy bonds issued in your home state, all else being equal. For muni investors in Illinois, Oklahoma, Iowa and Wisconsin there is no tax benefit from staying in state, because interest income from bonds in those states is subject to state income taxes.
Who is a good person to invest in muni bonds?
Muni bonds are often a good investment for people with high incomes, such as celebrities, living in states with high income taxes, such as California. A retiree with limited income living in a state without income taxes, such as Florida, benefits less from the tax exemptions of municipal bonds. Should You Consider Muni Bonds?
