The Benefits of Tax-Exemption

 

Municipal bonds (or investment products that invest in municipal bonds) may provide an important advantage to investors: The interest they generate is almost always exempt from federal income tax.1

This benefit may be of special interest to investors in high tax brackets; the higher the bracket, the greater the potential advantage … and the better municipal bonds look relative to other taxable investments. Consider the hypothetical case of an investor in a 24% federal tax bracket who has $100,000 to invest: A taxable bond yielding 4% provides an investor with $3,040 in after-tax interest income, but a municipal (tax-exempt) bond yielding 4% provides an investor with $4,000 in tax-exempt interest income2 — a difference of $960.

 

The Municipal Advantage

The Municipal Bonds Advantage

Source: Legg Mason.

 

Many investors do not know their current tax bracket, which is based on filing status (single, married filing jointly or qualifying widow(er), married filing separately, head of household) and taxable income. Knowing your tax bracket will allow you to gain an understanding of the potential tax benefits you may reap via a tax-exempt investment.

For more information about how you can benefit from municipal bonds or products that invest in municipal bonds, speak to your financial advisor, who can help you evaluate them in the context of your current portfolio.

 


 


Your financial advisor can help you develop a long-term investment plan with a balance of strategies that addresses your need for portfolio growth, income, capital preservation and risk management.

 

Certain investors may be subject to state or local income taxation. Income from “private activity” municipal bonds may be subject to federal, state or local alternative minimum taxes (AMT). Capital gains, if any, are fully taxable.

Please note that the analysis presented here does not account for state or local taxes, if applicable. Consult your tax advisor about your particular situation. All investments involve risk, including loss of principal.

Fixed income investments are subject to interest rate risk. As rates rise, the price of fixed income securities falls. Certain investors may be subject to state and local taxation. Income from “private activity” municipal bonds may be subject to federal, state or local alternative minimum taxes (AMT). Capital gains, if any, are fully taxable. Consult your tax advisor about your particular situation.

Legg Mason, Inc., its affiliates, and its employees are not in the business of providing tax or legal advice to taxpayers. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any such taxpayer for the purpose of avoiding tax penalties or complying with any applicable tax laws or regulations. Tax-related statements, if any, may have been written in connection with the “promotion or marketing” of the transaction(s) or matter(s) addressed by these materials, to the extent allowed by applicable law. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.

Any information, statement or opinion set forth herein is general in nature, is not directed to or based on the financial situation or needs of any particular investor, and does not constitute, and should not be construed as, investment advice, forecast of future events, a guarantee of future results, or a recommendation with respect to any particular security or investment strategy or type of retirement account. Investors seeking financial advice regarding the appropriateness of investing in any securities or investment strategies should consult their financial professional.