Tax Free Income & Municipal Bonds - Wisconsin

There are a number of ways to obtain tax-advantaged income, but municipal bonds are one of the most common sources.

Municipal bonds are issued by local and state municipalities, and they pay interest that is free from federal income tax (in Wisconsin municipal bonds may be free from state taxes as well).  This can make them attractive for investors in a higher tax bracket.  To compare the yield of a municipal bond to the yield of a corporate bond, or certificate of deposit you need to adjust for the taxes you save on the income from the municipal bond.

Tax equivalent yields are based on a combined federal and state tax rates of 28%, 33%, and 35%.

For example; if you're in the 33% tax bracket then a 4% municipal bond has a tax equivalent yield of 5.97%.  That means you'd have to find a corporate bond or CD paying better than 5.97% to compete with a 4% municipal bond. 

Please be advised that income from municipal securities is generally free from federal taxes and state taxes for residents of the issuing state. While the interest income is tax-free, capital gains, if any, will be subject to taxes. Income for some investors may be subject to the federal Alternative Minimum Tax (AMT).

Municipal bonds can be complicated. There are general obligation bonds, revenue bonds, pre-refunded bonds, bonds with sinking funds, insured bonds, Build America bonds, unrated bonds, and bond subject to AMT. The Berrall Kons Group is a family team of financial advisors in Waukesha, Wisconsin. We're here to help you navigate the complexity and create and income for you in retirement. Please contact us to discuss your situation.

 Wells Fargo Advisors does not provide tax or legal advice. Be sure to consult with your own tax and legal advisors before taking any action that may have tax or legal consequences.