Municipal Bond Tax Treatment
Interest usually federally tax-free; gains are not.
What is Municipal Bond Tax Treatment?
Interest on most municipal bonds is exempt from federal income tax, and generally from state tax for residents of the issuing state. Capital gains on munis are taxable. Interest on certain private activity bonds is a preference item for the alternative minimum tax. Tax-equivalent yield = muni yield / (1 - marginal tax rate).
Municipal Bond Tax Treatment: a worked example
A Californian holding a California muni typically pays neither federal nor state tax on the interest; an Oregonian holding the same bond pays Oregon tax.
More terms in Bonds & Cash Equivalents
Certificate of Deposit (CD)
A bank time deposit paying a fixed rate for a fixed term, FDIC insured.
Commercial Paper
Unsecured short-term corporate debt, 270 days or less.
Treasury Inflation-Protected Securities (TIPS)
Treasuries whose principal adjusts with the CPI.
Zero-Coupon Bond
Sold at a deep discount, pays no interest, matures at par.
Asset-Backed Securities (ABS / MBS)
Bonds backed by pools of loans - mortgages, auto loans, credit cards.
General Obligation (GO) Bond
A municipal bond backed by the issuer's full faith, credit, and taxing power.
Revenue Bond
A municipal bond repaid only from the revenue of a specific project.
Insured Municipal Bond
A muni with third-party insurance guaranteeing principal and interest.