Municipal bonds are issued by cities, states, and local governments to fund public projects. Their interest income is generally exempt from federal income taxes, and bonds purchased in an investor’s home state can also be exempt from state taxes. Although municipal bonds often have lower headline yields than comparable corporate or Treasury bonds, the after-tax return can be higher for investors in high tax brackets. A comparison between a 4% municipal bond and a 5% taxable bond shows taxable bonds can win at a 10% bracket, while municipal bonds can win at a 40% bracket. The decision depends on marginal tax rate and state tax considerations.
"Munis are issued by cities, states, and local governments to fund roads, schools, and hospitals. The hosts noted that "they pay interest income that's generally exempt from federal income taxes," and buying bonds from your home state can also exempt the income from state taxes. The trade-off: munis "offer yields that are often lower than that of a comparable corporate or a Treasury bond.""
"The podcast laid out a clean example. Imagine a 4% municipal bond next to a 5% taxable bond, each on $1,000 of principal. Investor in a 10% bracket: The taxable bond keeps $45 after tax; the muni keeps $40. Taxable wins. Investor in a 40% bracket: The taxable bond keeps just $30 after tax; the muni keeps the full $40. Muni wins."
"The lower stated yield delivers the higher take-home return once the tax bite gets steep enough. For context, the top federal marginal rate for tax year 2026 remains 37% for single filers with incomes above $640,600 and married couples filing jointly above $768,700. Layer on state income tax in places like California or New York and the effective marginal rate easily clears 40%."
"The hosts boiled the decision down to a simple framework. What is your marginal tax bracket? The higher it climbs, the more valuable tax-exempt income becomes. Investors in the 3"
Read at 24/7 Wall St.
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