Taxation of Municipal Bonds

Municipal bonds are debt securities issued by states, cities, or other local government entities to finance public projects. The key advantage of these bonds is that the interest income earned by investors is often exempt from federal income taxes and may also be tax-exempt at the state and local levels, depending on the investor's residence. This tax benefit makes municipal bonds attractive to individuals in higher tax brackets, as it can lead to a higher effective yield compared to taxable investments, despite typically offering lower interest rates. Always consider potential risks, as bonds can involve credit and market risks.