Municipal bonds (also known as “munis”) are fixed-income investments that can provide higher after-tax returns than similar taxable corporate or government issues. In general, the interest paid on municipal issues is exempt from federal taxes and sometimes state and local taxes as well.

How much interest do tax free municipal bonds pay?

High-yield municipal bond returns are up around 1.5% year to date and have generally outperformed many other fixed-income asset classes such as investment-grade corporate bonds which have gone down 5.3% year to date.

How is interest from bonds taxed?

The rate you’ll pay on bond interest is the same rate you pay on your ordinary income, such as wages or income from self-employment. There are seven tax brackets, ranging from 10% to 37%. So if you’re in the 37% tax bracket, you’ll pay a 37% federal income tax rate on your bond interest.

Is interest from state and local municipal bonds taxable?

Income from investing in municipal bonds is generally exempt from Federal and state taxes for residents of the issuing state. While the interest income is tax-exempt, any capital gains distributed are taxable to the investor. Income for some investors may be subject to the Federal Alternative Minimum Tax (AMT).

Do you have to pay taxes on municipal bonds?

Tax on income. Funds that exclusively hold U.S. Treasury bonds may be exempt from state taxes. Interest income generated by municipal bond funds is generally not subject to federal taxes, and may also be exempt from state and local taxes if the bonds held by the fund were issued by the state in which you live.

Do you pay taxes on interest paid on bonds?

State income tax. If you purchase a bond from your home state, generally the interest payments you receive will be exempt from state income taxes. However, interest paid on bonds from outside of your home state typically will be subject to state income tax.

How is income from a bond fund taxed?

Tax on income. How that income is taxed depends on the underlying investments that are generating that income. The income from taxable bond funds is generally taxed at the federal and state level at ordinary income tax rates in the year it was earned. Funds that exclusively hold U.S. Treasury bonds may be exempt from state taxes.

How to calculate tax equivalent yield on municipal bonds?

However, to more accurately determine which bond is best, the investor can calculate the tax-equivalent yield. The tax-equivalent yield is the pre-tax yield that the taxable bond must pay in order to equal the tax-free municipal bond yield. The calculation is the tax-free municipal bond yield divided by one, minus the investor’s tax rate.