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Tax Advantages Of Municipals

The dawn of a new year brings with it tax season and a renewed focus amongst taxpayers, all of whom are looking to get tax breaks and tax advantages wherever possible. One popular choice for those looking for a tax-friendly investment is municipal bonds.

The municipal bond advantages are plentiful. First of all, municipal bonds appeal to a citizen's sense of civic pride. What better way to contribute to the future of a city, county or state than by purchasing bonds intended to improve the quality of life for its residents in the years and decades to come?

Just as importantly, the municipal bond advantages are a huge help come tax time and are especially appealing to middle-class investors. According to the 1998 Federal Reserve Flow of Funds Report, about 70 percent of all municipal bonds are owned by individuals. The municipal bond advantages stretch far and wide, from the safety of the investment to the profit it can provide. Here are some tax advantages of municipals:

—Municipal bonds almost always provide some kind of tax exemptions. While U.S. Treasury securities are subjected to taxes at the federal level, they are exempt from state taxes. However, some municipal bonds offer "triple tax-exempt" status—i.e. they are exempt from all state and local taxes. In order to qualify for this status, an investor must live in the city, county and state in which the municipal bond is issued.

—One of the municipal bond advantages that people often overlook is the benefit of purchasing a municipal bond when its rate is lower than that of a taxable bond (such as a corporate bond). But investors need to take into account the taxes they'll have to pay on the latter bond. Every municipality differs, of course, but before deciding to choose a taxable bond over a municipal bond, see if the advantages of municipals make it worthwhile to take a lower yield in exchange for a better net profit.

The advantages of municipals make these bonds an excellent choice for those looking for a safe investment that will also provide one a valuable tax break.  Contact your broker and begin enjoying municipal bond advantages today!

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