Thursday, May 20, 2010

State Bonds Which Are Tax Exempt

If you buy municipal bonds within your home state, that may qualify you for the triple tax free investment status. That means that you won't have to deal with home state taxes, nor federal and local. Within a normal tax bracket, muni bonds are most often tax exempt, based on the interest that is earned federally. Meant to be a promoter of investing within your own municipality, this rule is there to help you.

Issued by local and state governments, municipal bonds include: municipal authorities, counties and cities, towns and schools, and also states. Exempt from federal tax, the interest payments on municipal bonds are affordable for first-time investors, though those investors may find themselves paying state and local taxes.

Tax Free Yields

Before you take the plunge and begin purchasing muni bonds, you need to understand how tax exempt yields work, exactly. The higher yields go towards the higher tax brackets. If you are within the 28% tax bracket, consider purchasing 6% municipal bonds at par, the yield would be somewhat higher than 6%. If you want an easy formula for this equation, implement this one: the municipal rate or coupon, divided by 100, minus the bracket of taxation, equals yielded funds.

Here are some examples of this equation: 6% by 72%, equals approximately 8.33%. To achieve a return that is better than the bond, you need more than the end 8.33% in taxable investments. Lower tax brackets, it follows, result in lower tax free yields.

If all of that math is too complicated for you, there may be a representative at your local credit union who would be happy to discuss your investments with you for a nominal fee. Banks, too, are eager to help their customers invest wisely, as the customers' profits inevitably end-up in the banks, again. Try it yourself, or ask an expert.


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