{"id":175341,"date":"2020-08-26T20:39:00","date_gmt":"2020-08-27T00:39:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/trading-lessons\/tax-considerations\/"},"modified":"2024-01-24T16:28:33","modified_gmt":"2024-01-24T21:28:33","slug":"tax-considerations","status":"publish","type":"trading-lessons","link":"https:\/\/www.interactivebrokers.com\/campus\/trading-lessons\/tax-considerations\/","title":{"rendered":"Tax Considerations"},"content":{"rendered":"<p>While investors of municipal bonds are not subject to federal tax, they may be required to pay taxes to the state, county, and\/or city in which they reside.<\/p>\n<p>As we discussed in our previous lesson, if an investor makes an in-state municipal bond purchase, the interest earned would be exempt from federal, state, and local income taxes. However, if an investor makes an out-of-state purchase, the interest earned is still exempt from federal tax, but typically subject to state and local taxes.<\/p>\n<p>Some municipal securities may be referred to as \u2018triple-tax-exempt,\u2019 meaning the interest earned on bonds issued by a U.S. territory, such as Puerto Rico or Guam, are not subject to federal, state, or local taxes.<\/p>\n<p><img decoding=\"async\" class=\"size-medium wp-image-2750 aligncenter lazyload\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2023\/01\/muni-bonds_lesson-10_1.jpg\" alt=\"\" width=\"960\" height=\"540\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 960px; aspect-ratio: 960\/540;\"><\/p>\n<h3><strong>Build America Bonds (BABs)<\/strong><\/h3>\n<p>BABs were a form of taxable municipal issuance, which originated with the American Recovery and Reinvestment Act of 2009.<\/p>\n<p>The BABs program, which expired in 2010, was intended to help state and local governments finance capital projects, such as roads, bridges, and public schools, at a substantially lower cost. These generally aimed at attracting taxable, fixed-income investors.<\/p>\n<p><img decoding=\"async\" class=\"half aligncenter wp-image-2753 size-medium lazyload\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2023\/01\/muni-bonds_lesson-10_2.jpg\" alt=\"\" width=\"960\" height=\"540\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 960px; aspect-ratio: 960\/540;\"><\/p>\n<p>Recall also from the previous lesson that we were able to calculate the net, after-tax yield of a taxable bond, as well as the taxable equivalent yield of a federally tax-exempt bond.<\/p>\n<p>For handy reference, keep in mind that corporate bonds are typically subject to both federal and state taxes, while U.S. government debt is subject to federal taxes, but not state taxes, and municipal securities are not subject to federal taxes, and may not be subject to state taxes, depending on where the buyer resides (see table above for reference).<\/p>\n<h3><strong>Tax Law Changes<\/strong><\/h3>\n<p>Also, U.S. tax laws are always changing. One relevant, recent change was introduced with the Tax Cuts and Jobs Act of 2017, which effectively placed a cap on state and local tax deductions, commonly referred to as SALT deductions.<\/p>\n<p>We\u2019ve provided a link to the IRS website in the \u2018Additional Info\u2019 to this lesson, where you can find more details, as well as some examples, pertaining to this rule.<\/p>\n<p><img decoding=\"async\" class=\"half aligncenter wp-image-2754 size-medium lazyload\" data-src=\"\/campus\/wp-content\/uploads\/sites\/2\/2023\/01\/muni-bonds_lesson-10_3.jpg\" alt=\"\" width=\"960\" height=\"540\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 960px; aspect-ratio: 960\/540;\"><\/p>\n<p>&nbsp;<\/p>\n<h3><strong>Capital Gains &amp; Losses<\/strong><\/h3>\n<p>It\u2019s also important to note that municipal bonds are subject to taxes on their capital gains and losses, along with other capital assets such as stocks. These taxes differ from the taxation on a municipal bond\u2019s interest.<\/p>\n<p>Generally, if a municipal bond is sold for less than its cost, the result is considered a capital loss, and if it\u2019s sold for more, then the investor experiences a capital gain.<\/p>\n<p>While municipal securities are not subject to federal tax, a capital gain from a sale or redemption would face taxation, and in some cases, the gain would be reported as ordinary income.<\/p>\n<p>&nbsp;<\/p>\n<p><strong>Disclosures<\/strong><\/p>\n<p><em>Please keep in mind that the information in this presentation is provided for informational purposes and should not be relied on for tax, legal or accounting advice. Before engaging in any transaction, you should consult your own tax, legal and accounting advisors. <\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Interactive Brokers&#8217; senior market analyst Steven Levine provides a broad overview of tax considerations when deciding on a municipal bond investment, part of the U.S. Municipal Bond Market video series, available at IBKR Traders&#8217; Academy.<\/p>\n","protected":false},"author":899,"featured_media":181011,"parent":0,"comment_status":"open","ping_status":"closed","template":"","meta":{"_acf_changed":false,"footnotes":""},"contributors-categories":[13576],"traders-academy":[13125,13128,13132],"class_list":{"0":"post-175341","1":"trading-lessons","2":"type-trading-lessons","3":"status-publish","4":"has-post-thumbnail","6":"contributors-categories-interactive-brokers","7":"traders-academy-beginner-trading","8":"traders-academy-level","9":"traders-academy-trading-lesson"},"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v26.9 (Yoast SEO v27.3) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>Archives | Traders&#039; Academy | IBKR Campus<\/title>\n<meta name=\"description\" content=\"While investors of municipal bonds are not subject to federal tax, they may 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