Most of us want our communities to be the best that they can be. In fact, many people are actively involved in groups whose sole purpose is to make the community they call home a place of which they can be proud.
Unfortunately, not all everyone has time to be involved in such groups. If you fall into this category, there may still be a way for you to support your community -- by purchasing municipal bonds.
Municipal bonds can be issued by villages, cities, counties, states, state agencies and special districts to finance a multitude of projects. For instance, your local school district may issue bonds to help pay for a new school; a state may issue bonds to build additional highways or bridges, or a city may issue bonds to improve its sewer system.
When you invest in a municipal bond, you receive a fixed interest payment every six months and the satisfaction of knowing you helped make local improvements possible. Better yet, all the interest you receive from municipal bonds is free from federal income tax and, in some cases, state and local taxes, as well. However, you may be subject to alternative minimum tax.
Municipal bonds can provide significantly more after-tax income than comparable taxable investments. Even knowing this, you may be surprised the first time you compare the rates paid by tax-free and taxable investments. Remember, to get the true picture, you must compare after-tax returns. For example, if you are in the 25 percent federal tax bracket, you would have to find a taxable investment paying 6 percent to yield the same after tax return of a tax-free investment paying just 4.5 percent.
Not all municipal bonds are created equally. Before investing, do your homework. Ask about the features of the bond. Is it insured? Does it offer call protection, so the bond cannot be called prior to maturity? Both are important questions. If you've gotten satisfactory answers to these questions and you could benefit from regular tax-free income, give municipal bonds a try. It's a great way to give both your community and your tax bill a helping hand.
