Taxable Municipal Bond

  

Categories: Tax, Muni Bonds

Most municipal bonds are exempt from federal taxes. The theory goes that these local government projects create value for the community, so the federal government gives the bonds a market advantage by making them tax-free.

However, if the federal government determines that a particular bond issue does not create funds that will be used for helping the overall local community, it might deny tax-exempt status. Like, say, new rims for the mayor's car, or a luxury salon in City Hall that can only be used by members of the city council.

These situations lead to taxable municipal bonds: debt securities issued by local governments that don’t get the usual break from federal taxes.

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Finance: Who buys muni bonds?1 Views

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Finance allah shmoop who buys communi bonds who buys them

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rich people or rather people earning enough active income such

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that their marginal tax rates are very high Munich bonds

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are tax free so in practice they tend to offer

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lower net yields than taxable corporate bonds Okay so what's

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the math here Well if your ah high earner i'ii

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europe bo tox correction surgeon or an ambulance chasing attorney

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from new york Or an all star nfl linebacker with

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no felony drug or spousal battery convictions Yeah a few

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of those actually do exist Well then it's likely that

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you pay the highest marginal tax rates They seem to

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change every election cycle so will generalize here so we

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don't have to redo this video every two to four

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years At the highest rates you'll pay about thirty five

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percent federal tax and twelve ish percent state tax and

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usually an override for some other political initiative like obama

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care or the wall fund or the no child left

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behind fund at the zune fund Beyond those total them

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up And let's say you pay fifty percent marginal tax

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on your last in a few million bucks in earnings

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and let's also say for illustrative purposes here assumed that

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the bonds we are comparing our of equivalent risk and

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duration compared with these immunities right Let's say so They're

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both a rated and they come due in on a

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half a dozen years Well the corporate bonds than yield

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us a seven point two percent and the parallel nooni

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bond yields four percent So then which bond has the

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higher value to its high tax paying owner Well if

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you're paying fifty percent tax on the seven point two

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percent corporate bond than you the nun convicted linebacker pay

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net after tax fifty percent of seven point two percent

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interest or three point six percent The munich carries no

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tax so it's gross is net meaning the four percent

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yield of them unibond produces point four percent a year

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Better yield after taxes then does the corporate bond So

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what if you were a sir school teacher not rich

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paying this a twenty percent marginal tax instead of fifty

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Well then you'd go for the corporate bond It yields

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gross seven point two percent But after your twenty percent

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tax the yield after tax on that corporate to you

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mrs whitehead homeroom number fourteen teacher of health and sex

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ed to simply horny teams Yes your yield then is

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point eight times seven point two or five point seven

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six percent way higher than the muniz yield of four

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percent The differences here in yield from a corporate versus

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immune e maybe don't seem like a lot but over

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time they really add up So once you make your

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first one hundred million or so don't forget teo you

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