Welcome to another week of tips on how to increase your investment profits! As always, reach out with any questions.
This is an interesting type of bond. Instead of buying a bond from a company, you buy a bond from a municipality. This bond is issued by a local government or their agencies.
Potential issuers could include states, cities, counties, school districts, special-purpose districts, or any other entity at or below the state level.
To help these government entities raise money, the IRS doesn’t charge tax on the interest of municipal bonds.
If you bought a municipal bond, and it was paying you $100 of interest, you wouldn’t have to pay any income tax on that interest. These are good investments for those trying to keep their income taxes low.
However, there’s no tax break for the capital gains. If you sold your municipal bond for a $500 capital gain, that would be taxable. You only get a tax break on the interest.
Generally with municipal bonds, the higher the tax bracket you’re in, the more these investments make sense because then you’re getting much more of a tax benefit.
If you’re in a 10 or 15 percent tax bracket, municipal bonds aren’t really that great of an investment. But if you’re in the 35 percent tax bracket, then these are definitely something to consider.
Note: always consult with your tax professional as tax regulations are updated frequently.
You may be wondering about the risk associated with municipal bonds. It’s important to know that each bond has a rating from a credit agency saying how safe of an investment it is. This rating really matters, and this is true for every bond.
In these times of high debt, you have to be careful not to buy from a municipality that has a low credit rating. You don’t want to take the chance that they might miss payments or even go bankrupt.
Be sure to do your research ahead of time. Just because a bond comes from a government agency doesn’t guarantee it’s safe.
Thanks for reading! Stay tuned for more tips.