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Author: AngelMay Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35272  
Subject: Question About Tax-Exempt Bonds Date: 7/10/2009 11:33 AM
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Hello - I have a question about tax-exempt bonds.
I'm assuming that the dividends are what are tax emempt -- and not any capital gains/losses you may have when you sell the fund (I'm talking about bond funds here).

Is that correct?

Thanks,

AM
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Author: AngelMay Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 28191 of 35272
Subject: Re: Question About Tax-Exempt Bonds Date: 7/10/2009 12:49 PM
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Excuse me, am I on the wrong board?
Does anyone know the answer to my question?

AM

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Author: blacktreechaser Three stars, 500 posts 9 Year Anniversary! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 28193 of 35272
Subject: Re: Question About Tax-Exempt Bonds Date: 7/10/2009 1:15 PM
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Capital gains are typically taxable. There should be something in the fund prospectus about it. Or just call the fund manager, they are usually friendly and answer tax questions.

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Author: AngelMay Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 28194 of 35272
Subject: Re: Question About Tax-Exempt Bonds Date: 7/10/2009 1:25 PM
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Thank you.

AM

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Author: WendyBG Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 28195 of 35272
Subject: Re: Question About Tax-Exempt Bonds Date: 7/10/2009 1:47 PM
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<I have a question about tax-exempt bonds.
I'm assuming that the dividends are what are tax emempt -- and not any capital gains/losses you may have when you sell the fund (I'm talking about bond funds here).>

You are talking about bond funds here.

You live in WA State, which doesn't have a state income tax. To make the answer more general to other readers, I will include states that do have a state income tax.

Although a bond fund pays a "dividend," this dividend is taxed as if it is interest (ordinary income tax rates). Bond fund interest "dividend" do not get the lower tax rate of qualified stock dividends.

Treasury interest is state tax exempt, but not federal tax exempt. (This is important in high tax states, such as Oregon.) For you, living in WA State, this is not tax exempt.

Municipal bond interest is Federal tax exempt. If you lived in a state with an income tax, muni interest would only be state tax exempt if you lived in that state. That's why Vanguard has separate CA, NY, etc. muni bond funds. For you, living in WA State, the federal tax would be exempt. The state and local tax exemption would not apply to you. This is shown on a 1099-DIV form, but it is reported as tax-exempt interest income -- your tax prep software will have a box for that.

Capital gains are treated as such. If you bought a share of a bond fund with NAV of 10 and sold it at 12, the $2 of capital gains would be taxed short/long, as if it was a stock fund. Mutual fund companies, such as Vanguard, send a 1099-B that shows the average cost and sale price of shares, which shows the capital gain and makes it simple to fill in the Schedule D.

Wendy

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Author: AngelMay Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 28196 of 35272
Subject: Re: Question About Tax-Exempt Bonds Date: 7/10/2009 1:52 PM
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Thanks, Wendy.
I just wanted to make sure I was thinking correctly about the taxation of capital gains when selling a tax-exempt bond fund. It appears the answer is yes. :)

Thanks for your help.

AM

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Author: ngcpa Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 28199 of 35272
Subject: Re: Question About Tax-Exempt Bonds Date: 7/10/2009 3:01 PM
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AM:
Capital gains are federally taxed whether from a muni bond fund or any other asset. However the rules can vary according to state when it comes to state tax. For wxample in Maryland (where I live) capital gains earned on the sale of Maryland munis (or even a bond fund of Maryland munis) are subtracted off to arrive at state taxable income. This is true although the gains are taxed by IRS. However in Maryland for state tax purposes you can't subtract off gains made on other (out-of-state) muni bonds.
Norm

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Author: ngcpa Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 28200 of 35272
Subject: Re: Question About Tax-Exempt Bonds Date: 7/10/2009 3:03 PM
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oops! I didn'r realize Wndy already said this better and in more detail. When I made my post, I hadn't read hers yet. Sorry.
Norm

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Author: AngelMay Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 28203 of 35272
Subject: Re: Question About Tax-Exempt Bonds Date: 7/10/2009 4:58 PM
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oops! I didn'r realize Wndy already said this better and in more detail. When I made my post, I hadn't read hers yet. Sorry.
Norm

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No problem - I still appreciate the reply.

:)

AM

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