UnThreaded | Threaded | Whole Thread (6) | Ignore Thread Prev | Next
Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35380  
Subject: Re: This is probably a dumb question Date: 5/2/2002 9:22 AM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 2
To add to Foolbar's (correct) comments:

The interest earned on municipal bonds held by a municipal bond ("tax-exempt") fund are exempt from federal income taxes (although there are complications if you are wealthy enough to be subject to the Alternative Minimum Tax). Any capital gains (or losses) from the fund buying of selling bonds are subject to capital gains taxes (or losses), which is also the case if you sell your shares in the fund for more than you paid (you get capital gains tax loss, if you sell for less). Some municipal funds also hold a portion of U.S. Treasury bonds, whose interest would be taxable on your U.S. Taxes.

The easiest way to decide which is best is to divide the yield on the "tax-exempt" fund you are looking at by (100 minus your tax bracket)% and compare with the yield on an analogous taxable fund. So, if you are in the 27% tax bracket, you would divide by 73%; in the 30% bracket by 70%. Don't forget tax brackets will be going down by a couple of percentage points over the next few years (unless, of course, they don't). Be sure you compare a long term tax exempt fund's yields with a long term taxable fund's, intermediate term with intermediate, short term with short term. The last time I ran the numbers on Vanguard's funds, the tax-exempt long term and intermediate funds ran neck and neck with the analogous corporate fund for someone in the 30% tax bracket; in the 27% bracket, the corporate funds won.

However, you also need to pay attention to your state income taxes. Municipal bonds issued in a state are (I think this is universal, but I'm not sure) exempt from state income taxes as well as federal. So, if you have a high state income tax, a state specific municipal bond fund makes a big difference: add your state income tax to you federal tax bracket and divide into the yield to do the comparison (e.g, if you have a 6% state income tax and are in the 27% tax bracket, you would divide yield by 67%).
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (6) | Ignore Thread Prev | Next

Announcements

Pencils of Promise - Back to School Drive
"Pencils of Promise works with communities across the globe to build schools and create programs that provide education opportunities for children."
Managing Your Wealth
Our own TMFHockeypop from Rule Your Retirement fame on the TV show Managing Your Wealth.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement