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Tax-free municipal bonds for today’s tax-conscious investor.
For High-Net-Worth individuals, tax-free municipal bonds are among the most popular types of investments and one of the few tax shelters available today. Under present federal income tax law, the interest income you receive from investing in tax-free municipal bonds is not subject to federal income taxes.
In most states that levy income taxes, interest income received from bonds issued by governmental units within that state is also exempt from state and local taxes. Interest income from bonds issued by U.S. territories and possessions is exempt from federal, state, and local income taxes.
Benefits of tax-free municipal bonds.
Tax-exempt municipal bonds offer a wide range of benefits, including:
- Attractive current income free from federal and, in some cases, state and local taxes
- A predictable stream of tax-free income
- A wide range of choices to make your investment objectives regarding investment quality, maturity, choice of the issuer, type of bond, and geographical location
- Liquidity at the current market price in the event you must sell before maturity
Municipal securities consist of both short-term issues (often called notes) and long-term issues (bonds). Short-term notes typically mature in one year or less and are used by an issuer to raise money in anticipation of future revenues, while bonds are usually sold to finance capital projects over the longer term.
Investing in municipal bonds involves risk, including the risk of default by the issuer on the payment of interest and principal when due. Prices are subject to market fluctuation and if sold prior to maturity, the amount received may be more or less than the amount invested. Interest on certain municipal bonds may be subject to federal alternative minimum tax and capital gains, if any, are subject to tax.
Types of tax-free municipal bonds.
The two basic types of tax-exempt municipal bonds are:
General obligation bonds: Principal and interest are secured by the full faith and credit of the issuer and usually supported by either the issuer’s unlimited or limited taxing power.
Revenue bonds: Principal and interest are secured by revenues derived from tolls, charges, or rents from the facility built with the proceeds of the bond issue. Public projects financed by revenue bonds include toll roads, bridges, airports, water and sewage treatment facilities, hospitals, subsidized housing, etc.