The interest income earned from municipal bonds is tax-free of all federal income taxes regardless of your tax bracket. This is the most significant benefit of municipal bonds and it is a characteristic unique to municipal bonds. Not even US Treasuries offer income that is free from federal income taxes.
Additionally, municipal bonds can be free of state income taxes as well. In most states, for residents of the state where the municipal bond issuer is located, the interest income from municipal bonds is free from state income taxes. For instance, a resident of Los Angeles can buy any municipal bond issued by a municipality in California and does not have to pay California state income taxes on the interest income. However, if the same LA resident purchased a Texas municipal bond, the income would be tax-free on a federal level, but the California resident would owe state income taxes since it is a bond issued out-of-state.
Other tax exemptions can include being free of city income taxes as well in cities like New York City when qualifying municipal bonds are purchased. Most municipal bonds are also free of AMT or the alternative minimum tax.
As a result, the higher the investor’s tax bracket, the benefit of the tax-free income becomes greater. A person in the 35% tax bracket receives more benefit from the tax savings than does a person in the 25% tax bracket. To compare the tax-free interest from municipal bonds to other taxable interest-bearing investments, people often compare the “tax-equivalent yield”.
Tax-equivalent yield is simple to understand as a concept. Let’s say that a bank CD is paying 6% and a municipal bond issued in your state pays 4%. On an investment of $10,000, the bank CD earns $600 in annual interest while the municipal bond earns $400. However, a person in the 35% tax bracket must pay 35% of the $600 in federal income taxes, which is $210 in taxes resulting in $390 after taxes. The municipal bond in this case offers a better tax-equivalent yield earning $400 tax-free annually. Additionally, the interest from the CD will also be taxed at the state-level whereas the municipal bond will be free of state income taxes as well.
For an investors in high-tax states such as California and New York, the benefits of tax-free bonds are even greater than for residents of states without any state income tax such as Washington State or Nevada. The higher your state’s income taxes, the bigger your benefit from municipal bonds.
The other major benefit of owning municipal bonds is that they can serve as a hedge against future tax increases. For instance, if taxes go up on a federal or state level, the interest income from municipal bonds will remain constant since it is tax-free. As such for investors in tax brackets where tax increases are likely, municipal bonds can offer a level of protection.
How can I find ratings of Colorado Muicipal Bonds Example AAA Or AAA/aaa
How can I find ratings of municipal bonds in the state of Colorado? Ratting example AAA/Nr or Aaa/AAA
Ratings of CO. Munis
When is interest paid on Munis ?? Monthly ? Quarterly ?? Semi-annually ? What is meant by coupon ?? Where do I get application forms ?? Can I trade on-line ??
Ratings for municipal bonds are usually provided along with the prospectus information for a bond series. Most bond trading websites also provide the Moody’s and Standard and Poor ratings of a specific bond series. Ratings go from triple level letter down to single level. You can also check the Moody’s and Standard & Poor’s website for ratings information. It would go like this:
AAA
AA
A
BBB
BB
B
CCC
CC
C
They also may add a (+) or (-) symbol to indicate that the rating grade is above or below the current grade level similar to what you see in a report card.
Interest paid on municipals usually are in quarterly payouts (every three months), but check with the issuing bond information to be sure on that. The broker that you place the trade with can also provide that information. A coupon is an outdated term. In the old days, the bond had coupons attached which you cut out and took to the bank to deposit your interest fund payment. Municipal bonds no longer have these paper coupons anymore and the interest payout is either mailed to the investor or direct deposited to a bank account. You have to apply for a brokerage account in order to buy or sell municipal bonds. You can trade online, but check with the specific broker about that. Some brokers don’t have a bond trading option, so check first before opening an account. You can open an account through a brokerage office or go online and open one there. Be aware that you usually have to deposit some money into the brokerage account when you open it. The money in your brokerage account is used to purchase the bond when you place an order.
Correction to my previous post. Interest on bonds are usually distributed in semi-annual payouts, not quarterly.
what is the tax status of interest income on bonds issued by port authorities? the tennessee valley authority?