Tax Free Fixed Income
Tax free municipal bonds, also known as "munis," are debt obligations issued by state and local governments and other municipal entities. Munis can be attractive to investors in high tax brackets because, in most cases, the interest income is exempt from federal income tax.
If investors own municipal bonds issued within their state of residence, interest income may also be excluded from state and local taxes. A limited number of munis are considered items of tax preference for calculating the federal alternative minimum tax. NOTE: Munis may be subject to capital gains taxes if sold or redeemed above cost.
Ultimately, investors in higher tax brackets may choose municipal bonds in order to smooth and add an effective fixed income element to their portfolio. The chart provided shows how munis can provide a superior fixed income return for higher tax bracket investors with relatively equal risk profiles.