When it comes to investing and tax planning, it’s not a matter of winning or losing; it’s how you play the game. The following is a list of tax considerations associated with investing in bonds.
- The interest paid from bonds is taxed at your ordinary income tax rate.
- The interest from U.S. Treasury bonds, bills, and notes is exempt from state and local taxes.
- The interest from Municipal Bonds is generally exempt from federal taxes and from state and local taxes for residents of the state where the bond was issued.
- Since bond prices fluctuate, you may actually resell your bond for more than you paid for it; in this case, you will have to pay capital gains on your profit margin.
- The short term capital gains rate–which is the same as your ordinary income tax rate–is applied to bond investments held for less than 12 months.
- The long-term capital gains rate–which will vary based on your income bracket –is applied to bond investments held for longer than 12 months.