Muni taxes

Question 1

[Taxes on muni interest] - Federal level

Answer 1

Exempt

No federal taxes for interest on munis

Question 2

[Taxes on muni interest] - State level - out of state investor

Answer 2

Taxable

If buy munis out of your home state, have to pay state taxes

Question 3

[Taxes on muni interest] - State level - in state investor

Answer 3

Exempt

No state taxes on muni interest from your home state

Question 4

[Taxes on muni interest] - Local level - local municipality investor

Answer 4

Exempt

If invest in munis from your own municipality, no local taxes for interest

Question 5

[Taxes on muni interest] Local level - non local municipality investor

Answer 5

Taxable

If munis not from your own municipality, have to pay local taxes on interest

Question 6

[Taxes on muni interest] - Bonds from US territories

Answer 6

Triple tax exempt

Interest on bonds from US territories is exempt from all taxes (federal, state, local)

Question 7

Taxes for capital gains on munis

Answer 7

Taxable

Capital gains from munis is taxable

(If buying bonds at a discount in the secondary market, will be taxed at capital gains rate upon redemption)

Taxable at federal and state level?

Question 8

Formula for tax equivalent yield in munis

Answer 8

Municipal yield / (100% - investor’s tax bracket)

Example: Muni bond yielding 3.5%, investor in 15% tax bracket
3.5% / (100% - 15%) = 4.12% tax equivalent yield