Last week I pointed out that municipal bonds were currently favored by my firm over some other fixed income holdings. As summer volatility continues, I want to make sure you know as much as possible about these investments. Sunny days may be ahead for them especially considering where they have been.
Sunny Days for Municipals
The unique feature of municipal securities is the tax-exemption privilege. Interest income from qualified municipal securities is exempt from federal income taxes; in addition, state law usually exempts municipals from income taxes levied by the state of issuance. This exemption feature was created so that federal, state, and local governments would not interfere with each other in raising funds and providing services to their citizens. It arises from a constitutional doctrine known as “reciprocity” in which various levels of government recognize each other’s sovereignty over a variety of governmental functions.
Capital gains on municipal securities are not tax exempt, however, unless the security is issued at a discount from par. In that special case, any increase in price up to par value is considered part of the security’s interest return and is tax exempt. However, if the security continues to rise in price, that portion of the gain above par is subject to taxation once the investor realizes the gain.
~by Peter S. Rose & Milton H. Marquis
Money and Capital Markets
Quote of the Week: “Life consists not in holding good cards but in playing those you hold well.” ~Josh Billings
NABCAP Announces the 2012
Top Wealth Managers in Greater Phoenix Area
Things to Remember
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price. Municipal bond interest may be subject to alternative minimum tax. Municipal bonds are Federally tax-free but other state and local taxes may apply.