How Are Municipal Bonds Taxed ?
| Interest on municipal bonds is paid by local and state agencies who issue the bond. The best part is that most municipal bonds do not fall under the purview of IRS so you might never have to pay taxes on the interest. This is the reason why these bonds are offered at lower interest rates.
However, private use municipal bond interests are subject to some special adjustments and you will only be affected if you come under the alternative minimum tax bracket.
If you are planning to purchase municipal bonds, you first have to determine whether the investment makes investing sense. You will have to check out your taxable investment after you take into account your taxes.
This means that you first need to know your marginal tax rate. This is nothing by the rate of tax you pay on all your extra income. To know your tax rate, you first have to know your income. If you think that your income will be same as the previous year, you can get the Form 1040 and find the amount on line 39 of the form. It will also give you the details of your filing status.
You can check any online site that gives details on tax rate. Through these sites, you will be able to determine the marginal tax rate as you already have your taxable income in hand. For example, if your taxable income falls in the marginal tax rate of 35 percent, you will be paying an 35 percent income tax on the earnings from municipal bonds.
However, this said, most states do not tax instate municipal bond interest. If you are staying in Michigan and have purchased Michigan municipal bonds, you will not be paying any income tax on the interest you earn from the bonds. Although there are municipal bonds that are taxable and this is decided before the bond goes into the market. Usually municipal bonds that just benefit a few people will be taxable.
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