Finance Maxxing
Fixed Income & Bonds
Municipal Bonds
Interest is federal tax-exempt; may also be state/local exempt.
Municipal bond interest is exempt from federal income tax and NIIT. Depending on issuer, it may also be exempt from state and local tax.
Tax Treatment by Type
| Bond Type | Federal | State | Local | NIIT |
|---|---|---|---|---|
| In-state muni | Exempt | Exempt | Exempt | Exempt |
| Out-of-state muni | Exempt | Taxable | Taxable | Exempt |
| Private activity muni (AMT) | Exempt* | Varies | Varies | Exempt |
*May be subject to Alternative Minimum Tax (AMT)
Tax-Equivalent Yield
To compare munis to taxable bonds:
Tax-Equivalent Yield = Muni Yield ÷ (1 − Combined Marginal Rate)
Example: 3.5% muni, 37% federal + 10% state + 3.8% NIIT = 49.2% combined:
3.5% ÷ (1 − 0.492) = 6.89% taxable equivalent
When Munis Make Sense
- High marginal tax rate (federal + state > ~30%)
- Taxable accounts (not needed in tax-advantaged accounts)
- In-state bonds for triple tax-free benefit
- Long-term buy-and-hold (avoid trading costs)