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Interest income from Treasury bonds is subject to federal income tax but exempt from state and local taxes. This exemption can be particularly beneficial for investors in high-tax states.
A municipal bond, commonly known as a muni, is a bond issued by state or local governments, or entities they create such as authorities and special districts. In the United States, interest income received by holders of municipal bonds is often, but not always, exempt from federal and state income taxation.
These funds invest at least 80 percent of assets in municipal bonds, and, as we discussed earlier, interest income from municipal bonds is generally exempt from federal income tax. Examples of tax ...
Municipal bond arbitrage, also called municipal bond relative value arbitrage, municipal arbitrage, or just muni arb, generally consists of building a leveraged portfolio of high-quality, tax-exempt municipal bonds and simultaneously hedging the duration risk in that municipal bond portfolio by shorting the equivalent taxable corporate bonds.
In some cases, this arrangement may provide a federal tax exempt status to the bonds, and many times a property tax exemption on the collateral. The sponsoring government is not responsible for bond repayment and the bonds do not affect the government’s credit rating. IRBs are desired as the private business receives a lower interest rate ...
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.
Under Treasury Regulation section 1.141-2, an interest on a private activity bond is not excludable from gross income under section 103(a) of the Internal Revenue Code unless the bond is a qualified bond. Interest from private activity bonds became subject to the Alternative Minimum Tax after the Tax Reform Act of 1986. All things equal, yields ...
Though it’s impossible to avoid paying taxes on interest income, some taxpayers might consider investing more money in tax-advantaged accounts—like 529 plans, health savings accounts, IRAs ...