What Is a Taxable Municipal Bond?

A taxable municipal bond is a non-tax-exempt fixed-income security꧋ issued by a local government, such as a city, county, or related agency, to finance projects that the federal government will not subsidize.

Understanding Taxable Municipal Bonds

Taxable municipal bo💜nds are generally issued to finance an activity that is deemed not to provide a major benefit to the public. This means that the federal government will not grantꦚ a tax-exemption status to these projects.

A prominent feature of most municipal bonds is that they are tax-exempt. A 澳洲幸运5官方开奖结果体彩网:municipal bond is a bond issued by local and state governments to fund projects for the betterment of the community, such as building schools, highways, and hospitals. A municipality may also issue a bond on behalf of a private company, which may be otherwise unable to obtain financing for the project.

These 澳洲幸运5官方开奖结果体彩网:private activity bonds (PABs) attract private businesses, which results 🌃in more jobs in the area. An investor who buys a municipal bond is lending money to a municipality tha🥃t promises to pay interest periodically until the bond matures, at which point the principal investment is repaid to the investor. 

In order to encourage investors to purchase municipal bonds, the bonds are set up as exempt from 澳洲幸运5官方开奖结果体彩网:federal taxes and some 澳洲幸运5官方开奖结果体彩网:state taxes, depending on the situation and individual state laws. However, the tax-exempt status of municipal bonds is only granted if the projects funded from the proceeds of the issue provide a significant benefit to the community at large–in other words, the public.

Types of Taxable Municipal Bonds

The majority of taxable municipal𒐪 bonds are issued to finance the shortfalls of state and local pension funds. Other situations where taxable municipal bonds may be issued include financing local sports facilities, funding infrastructure-related repairs or investor-led housing, or refinancing debt.

Build America Bond (BABs) are an example of taxable municipal bonds. BABs were created under the 澳洲幸运5官方开奖结果体彩网:American🐟 Recov🌱ery and Reinvestment Act (ARRA) of 2009 and, although taxable, have special 澳洲幸运5官方开奖结果体彩网:tax credits and federal subsidies for either the bond issuer or holder. Taxable municipal bonds are popular among institution𒁏al investors and mutual funds that ca🔜nnot take advantage of other tax breaks.

Requirements for Taxable Municipal Bonds

Interest from municipal bonds issued to finance projects with no obvious public benefits is taxable since the federal government will not subsidize the financing of these projects. Since income from such bonds is taxable in the hands of the investor, taxable municipal bonds offer 澳洲幸运5官方开奖结果体彩网:risk-adjusted yields that are comparable to those available from other taxable entities, such as 澳洲幸运5官方开奖结果体彩网:corporate bonds and other 澳洲幸运5官方开奖结果体彩网:government agency bonds. The risks and benefits of each option will vary depending on a number of individual fact𝓀ors.

Some taxable municipal bond issues are exempt from state and, often, local taxes, in which case, investors who reside in the state of issuance are not taxed on their interest earnings at the state level. Thus, the 澳洲幸运5官方开奖结果体彩网:effective yield that t💛hey earn on the bond will actually be higher than൲ the stated yield.