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1. Municipal bonds. Unlike conventional bonds, where interest income is taxed at your ordinary income rate, municipal bonds offer tax-free interest income at the federal level. In some cases, you ...
For example, imagine you pay federal tax at a 24 percent rate and state tax at a rate of 6 percent, and the municipal bond offers a yield of 3 percent.
Interest income from most municipal bonds is excludable from gross income for federal income tax purposes, and may be exempt from state income tax as well, depending on the applicable state laws. [14] Internal Revenue Code section 103(a) is the statutory provision that excludes interest on municipal bonds from federal income tax. [15]
Municipal bonds generally carry less risk than stocks and are tax-exempt, which for higher tax-bracket investors effectively increases the return rate. It’s crucial to highlight though, that ...
The arbitrage manifests itself in the form of a relatively cheap longer maturity municipal bond, which is a municipal bond that yields significantly more than 65% of a corresponding taxable corporate bond. The steeper slope of the municipal yield curve allows participants to collect more after-tax income from the municipal bond portfolio than ...
That perception could thus potentially allow a local government to borrow at a lower interest rate, saving its taxpayers' money over the life of the bonds. Despite that advantage, many states, such as California under Proposition 13, do not allow local governments to issue unlimited-tax general obligation debt without a public vote.
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