Tax Strategies for Bond Investments
Tax and investment income often times go together hand in hand. If you are interested in bond investments, it is essential that you become familiar with the many investment tax strategies that can help you save money. In some cases, you may not be able to avoid tax on your investment income, but at the very least you should consider what you can do to better your situation. The more money you avoid paying in investment taxes, the more you get to keep in your own pocket.
Investing in municipal bonds is a great idea for many reasons. Above all else, these bonds are known as ‘tax advantaged’ investments. In other words, if you play your cards right your tax and investment income will not get in the way of each other. These bonds are particularly helpful, in terms of tax savings, if you are in a high-income tax bracket.
Did you know that any interest earned on municipal bonds is exempt from federal income tax? Along with this, it is usually exempt from state and local taxes for those living in the issuing state. With the ability to earn interest and avoid taxes, investing in municipal bonds has become more popular among a larger group of people.
Of course, not every detail of tax and investment income from bonds is as simple to understand. Unlike stocks, there is a chance that some bonds will face immediate taxation since you may receive income from them as often as twice per year.
With United States Treasury bonds, you will face federal income tax liability. Fortunately, you can avoid investment taxes on the state and local levels.
Corporate bonds, on the other hand, have no tax-free provisions. Make sure you know how these will affect your investment tax situation before you invest.
What about investment taxes on zero coupon bonds? At maturity, the full face value of these bonds is paid. With these, the IRS will compute the implied interest on a yearly basis. Although you don’t receive the interest until maturity you are still liable for paying taxes on the amount.
All in all, municipal bonds are the best deal in terms of what it means to your investment tax situation. With that in mind, the yield is not as great as other bonds.
Investing in bonds is a good idea for many reasons. As long as you are aware of the investment tax pros and cons, you should be able to choose the bonds that will benefit you the most.