Tax free bonds can be a great investment that lowers your tax obligations while still maintaining a fixed passive income. These bonds generally come in the form of municipal bonds or Treasury bonds. The tax advantage comes into play on the interest earned. Which can be exempt from your state, local, or federal income tax. Making tax free bonds a favorite investment among retirees and individuals in higher tax brackets.
Municipal bonds are bonds issued by states, cities, and counties for funds to build public projects. That new school, hospital or highway being built in your area is probably funded through a municipal bond. The local government gets the funding up front which usually gets the project started and finished sooner.
The interest income from tax free municipal bonds is exempt from federal income tax. Depending on the state you live in, it may also be exempt from state and local taxes, too. Generally, the higher your tax bracket the more benefit you’ll get from a tax free municipal bond. One thing to note, you’ll get no added tax benefit by holding these bonds in an IRA or retirement plan. Since the IRA or retirement plan already offers tax exempt status, you’re better off looking into taxable municipal or corporate bonds. Continue Reading…