What bond is tax-exempt?
Interest income from municipal bonds is exempt from federal income tax. In addition, municipal bonds issued within your state may be exempt from state and local taxes.
Municipal Bonds
Most bonds issued by government agencies are tax-exempt. This means interest on these bonds are excluded from gross income for federal tax purposes.
Most all interest income earned on municipal bonds is exempt from federal income taxes. When you buy muni bonds issued by the state where you file state taxes, the interest you earn is usually also exempt from state income taxes.
Municipal bonds are generally exempt from federal taxes and, in many cases, state and local taxes as well. As the saying goes, "nothing is certain in life but death and taxes," and this adage seems especially true for bond investors.
Tax-Exempt Interest. Interest on a bond that is used to finance government operations generally is not taxable if the bond is issued by a state, the District of Columbia, a U.S. possession, or any of their political subdivisions.
Taxation of federal government bonds
Income from bonds issued by the federal government and its agencies, including Treasury securities, is generally exempt from state and local taxes.
Is interest income from I bonds taxed as capital gains? No, the interest income earned from I bonds is not considered a capital gain and is therefore taxed differently. Instead, it is taxed as regular income at the federal level and exempt from state and local taxes.
You can skip paying taxes on interest earned with Series EE and Series I savings bonds if you're using the money to pay for qualified higher education costs. That includes expenses you pay for yourself, your spouse or a qualified dependent.
Most tax-exempt securities come in the form of municipal bonds, which represent obligations of a state, territory or municipality. For some investors, U.S. Savings Bond interest may also be free from federal income taxes.
In some cases, the amount of tax-exempt interest a taxpayer earns can limit the taxpayer's qualification for certain other tax breaks. The most common sources of tax-exempt interest come from municipal bonds or income-producing assets inside of Roth retirement accounts.
Why issue tax-exempt bonds?
Tax-exempt bonds generally offer lower interest rates and longer tenors than most taxable bonds, making them a well-suited and attractive means of financing energy efficiency or renewable energy projects for eligible borrowers.
Investors favor municipal bonds, or "munis," for two main reasons. They are exempt from federal taxes, and they are relatively low-risk investments. While stable, income-producing bonds warrant a position in any well-diversified portfolio, there are inherent drawbacks to owning munis.
Tax-exempt bonds are the primary mechanism through which state and local governments raise capital to finance a wide range of essential public projects.
A bond, issued by a state or local government, the interest on which is exempt from taxation. State and local governments issue debt ($267 billion in 1997) in exchange for the use of the savings of individuals and corporations.
As a result, you likely won't incur any capital gains tax. If, however, you purchase a municipal bond in the secondary market at a discount to the revised issue price, you can be taxed as either a capital gain or ordinary income, depending on the size of the discount and the years to maturity of the bond.
Taxable Bonds may be issued to advance refund prior Tax-Exempt Bonds, and Tax-Exempt Bonds may be issued to advance refund outstanding Taxable Bonds in certain situations, under guidance provided by the IRS Office of Chief Counsel (Chief Counsel Advice Memorandum 201843009).
Are Treasury bills a good investment? T-bills are known to be low-risk, short-term investments when held to maturity because the U.S. government guarantees them. Investors owe federal taxes on any income earned, but no state or local tax.
- 401(k) / 403(b) Employer-Sponsored Retirement Plan. ...
- Traditional IRA / Roth IRA. ...
- Health Savings Account (HSA) ...
- Municipal Bonds. ...
- Tax-Free Exchange Traded Funds. ...
- 529 Education Fund.
Treasury bills function more like cash in your portfolio and can be a safe harbor during turbulent economic times. Treasury bonds can provide a dependable stream of income, but can suffer a loss of value on secondary markets if interest rates go up.
- Investing in a tax-deferred account such as a traditional individual retirement account or a 401(k).
- Stashing money in a tax-exempt account such as a Roth 401(k) or a Roth IRA.
How to avoid tax on CD interest?
And you typically don't have to pay taxes on your earnings until you make withdrawals in retirement. To defer taxes on CD interest until retirement, you can open a CD within a tax-deferred retirement account — whether it's an employer-sponsored plan or an IRA.
You can report the interest each year you earn it or when you cash the bond. You will report it on Schedule B of your 1040. You can avoid these taxes by using the money for qualified higher education expenses.
| Fund | Symbol | 1-year total return |
|---|---|---|
| PIMCO High Yield Spectrum Instl | PHSIX | 14.07 |
| T. Rowe Price US High Yield I | TUHIX | 14.32 |
| Nuveen Preferred Secs & Inc I | NPSRX | 6.16 |
| Nuveen Flexible Income I | NWQIX | 8.94 |
Interest rate risks: As are all bonds, Treasury bonds are subject to price volatility as a result of changes in market interest rates. Inflation risk: The interest earned on Treasury securities may not keep pace with inflation (with the exception of Treasury inflation-protected securities, or TIPS).
Municipal bonds are federally tax-free and, in some cases, are free from state and local taxes too. That means, depending on where you live, you may never owe income taxes on the payments you receive from the bond's issuer (but they may be subject to the alternative minimum tax or AMT).
