Tax Advantages of Municipal Bonds

What are munis? And, what are their tax advantages?

“Munis” is a term used to refer to municipal bonds. Municipal bonds are tax-exempt bonds issued by states and local governments when they borrow money to finance projects such as new buildings, roads, or other public works projects. Munis are generally used to supplement tax revenues collected by the state or local government issuing the bond.

From an investment standpoint, municipal bonds typically pay interest (i.e., coupon rate) to the bondholders every 6 months until the bond matures. At maturity, the bonds are repaid. This is similar to the way that many other bonds work. In addition, municipal bonds are subject to the same types of risk as other bonds such as interest rate risk, credit risk, repayment risk, and reinvestment risk.

However, unlike other taxable bonds, the interest payments that a bondholder receives from municipal bonds are, in most cases, exempt from federal income taxes. For state income taxes purposes, interest from municipal bonds are typically exempt from state income taxes for bonds issued within that state. The treatment of municipal bond interest for state tax purposes will vary from state to state so it’s a good idea to check your state’s tax rules or consult with a tax professional before investing in municipal bonds.

The tax advantages of municipal bonds are one of the main factors that make it an attractive investment for those who need to generate ongoing income from their investment portfolios.