Tax-Exempt State and Local Municipal Bonds
Posted by William Byrnes on October 18, 2010
Why is this Topic Important to Wealth Managers? Discuses one alternative investment wealth managers are continuing to explore in consideration of uncertain tax law changes. Provides general background as well as analysis and comparison to show the benefits available through the purchase of tax-exempt bonds.
Interest received from bonds is generally taxed at ordinary income rates. This includes both government and corporate bonds unless otherwise excluded by the tax code. Dividends though are taxed at capital gains rates, which for the meanwhile can provide significant tax benefits. See our previous AdvisorFYI blogticle of September 13th Bush Tax Cuts Set to Expire.
However, some state and local municipal bonds often called “muni” bonds, produce tax—exempt interest income under Internal Revenue Code § 103. The general obligation interest on state or local bonds fall into this category as distinguished from private activity bonds.
A detailed discussion of private activity bonds in comparison to general obligation bonds can be found at AdvisorFX Tax Facts: Q 1123. Is interest on obligations issued by state and local governments taxable? (sign up for a free trial subscription if you are not a subscriber).
To read the remainder of this blogticle that deals with general obligation bonds, and offers a comparison between tax-exempt and taxable income bonds with illustrated rates of return, please see AdvisorFYI –