What is Tax-Exempt Security?
How Does Tax-Exempt Security Work?
For example, let's assume that John purchases $1,000 of municipal bonds. The pay 7% interest per year, or $70. Because municipal bonds are typically , John does not have to pay federal income tax on the $70 worth of interest income. He may also not have to pay state or local taxes on that income, depending on whether he lives in the municipality issuing the bonds.
Why Does Tax-Exempt Security Matter?
Tax-exempt securities also provide local governments and nonprofits (the most common issuers of tax-exempt securities) with lower borrowing rates. This in turn encourages governments and nonprofits to undertake new projects.
Considerable controversy exists regarding what sorts of securities should be tax exempt. Most of the time, an organization has to be registered under section 501(c)(3) of the Internal Revenue Code before it can issue tax-exempt securities.
It is also important to note that even though a tax-exempt security may provide income or gains that are exempt from federal income taxes, the taxpayer or organization might still have to pay state, local, or other types of taxes (such as payroll taxes, sales taxes, or excise taxes).
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 you find yourself continually overspending, you are not alone. Americans are seemingly addicted to consumption and it has brought about the highest levels of...Read More →
We're so used to the idea that we need $1 million or $2 million to retire, that we forget about the real issue when it comes to our retirement spending. There's...Read More →