Definition: What is a Tax Anticipation Note?
A tax anticipation note (TAN) is a short-term note that a state or local government issues and expects to repay with imminent tax receipts.
Tax Anticipation Note Example
Let's assume Town XYZ wants to purchase a new building to replace the old City Hall. The building costs $15 million. Town XYZ expects to pay $5 million cash for the building but needs to raise another $10 million by issuing new debt. It expects to receive at least that much next April after the annual filing deadline has passed, but the deal is scheduled to close six months before that date, in October.
Because of the timing, Town XYZ issues $10 million of tax anticipation notes that mature in May. (Tax anticipation notes are typically issued at a discount, meaning that the investors will pay, say, 95% of the face value of each ; the actual discount depends on the and the issuer’s creditworthiness.) The notes will pay buyers roughly 5% in annual interest. Remember, however, that the notes will be outstanding for less than one year.
Town XYZ is then able to purchase the building for $15 million in October. When April arrives, Town XYZ has its income tax receipts and uses a portion of them to repay the TANs (which generally get first dibs on tax receipts). TAN maturities are usually not longer than one .
Why Does a Tax Anticipation Note (TAN) Matter?
Tax anticipation notes provide state and local governments with a way to stabilize cash inflows and outflows during the year. This allows governments to proceed with capital projects immediately rather than waiting to have the actual cash in hand.
Tax anticipation notes are a type of municipal bonds -- investors are generally able to obtain interest tax-free.
Personalized Financial Plans for an Uncertain Market
In today’s uncertain market, investors are looking for answers to help them grow and protect their savings. So we partnered with Vanguard Advisers -- one of the most trusted names in finance -- to offer you a financial plan built to withstand a variety of market and economic conditions. A Vanguard advisor will craft your customized plan and then manage your savings, giving you more confidence to help you meet your goals. Click here to get started.
Read This Next
If Frankenstein author Mary Shelley had been an investment fanatic, she might've liked the idea of the Business Development Company (BDC...Read More →
Quantitative Easing (QE) is a hot issue. But even though the term is used frequently by journalists,...Read More →
Buckle up and hold on -- a new round of quantitative easing is here and things could start getting very ugly in the financial world over the coming months. The truth is that many...Read More →