With tax time here, some investors may want to consider revisiting municipal bonds and ETFs, such as the iShares National Muni Bond ETF (NYSEArca: MUB), in search of some tax advantages.
MUB seeks to track the investment results of the S&P National AMT-Free Municipal Bond IndexTM, which also measures the performance of the investment-grade segment of the U.S. municipal bond market.
“Municipal bonds, which are issued by state and local governments, occupy a special place in the investing landscape,” said BlackRock in a recent note. “The income from these bonds is exempt from federal income tax and sometimes state income taxes as well. This treatment can make them especially attractive for investors looking for ways to minimize their tax burden.”
Munis also help diversify fixed-income portfolios. Investors who typically follow the Barclays U.S. Aggregate Bond Index will not have municipal bond exposure, so a muni bond ETF can complement core fixed-income positions.
More Muni Advantages
Municipal bonds continue to experienced robust demand from U.S. investors as reliable source of yield, especially among taxable accounts due to the debt securities’ favorable tax-exempt status. The calendar indicates investors may want to give munis a look over the near term.
“For many investors in high tax states, such as California or New York, only $10,000 of state income taxes can be deducted. State-specific funds let investors deduct bond income from their federal and state tax returns,” according to BlackRock.
State-specific municipal bond ETFs include the iShares California AMT-Free Muni Bond ETF (NYSEArca: CMF) and the iShares New York AMT-Free Muni Bond ETF (NYSEArca: NYF).
Tax-conscious investors should also be aware of securities that are subject to the alternative minimum tax (AMT).
“Income from bonds issued by non-governmental entities, such as a development project for a municipal airport, might be subject to the alternative minimum tax,” according to BlackRock. “These bonds might yield more to make up for this tax treatment, but the bond holder will have to report this income and potentially pay tax on the interest. When evaluating an individual bond, mutual fund or ETF, make sure to check for the AMT exposure.”
For more information on the munis market, visit our municipal bonds category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.