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Municipal Bonds, or “munis,” are bonds issued by states, cities, counties and other governmental entities to raise money to build roads, schools and a host of other projects for the public good.
Municipal bonds are federally tax-free and, in some cases, are free from state and local taxes too. 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
State or local governments issue taxable municipal bonds when the federal government will not subsidize or fully subsidize the financing of certain activities that do not provide a significant benefit to the general public. Examples are:
- Investor-led housing
- Local sports facilities
- Refunding of a refunded issue and borrowing to replenish a municipality’s underfunded pension plans
Taxable municipal bonds offer yields that can be compared to those of other taxable bonds, such as corporate bonds, of similar credit quality, call features and maturity. The growth of the taxable municipal market in recent years has been significant. In fact, in the last five years alone, over $134 billion in taxable municipals have been issued.
State taxation of municipal bonds for individuals.
Even though interest from tax-free municipal bonds is exempt from all federal income taxes, state taxation of municipal bonds can vary some. States tax bonds that are within their own state as well as out-of-state bonds.
Certain municipal bond interest is subject to federal alternative minimum tax for some investors. Capital gains on municipal bonds are subject to tax.