Feeling Taxed? What You Need To Know About Municipal Bonds

Feeling Taxed? What You Need To Know About Municipal Bonds by Peter Hayes, BlackRock

With markets volatile and tax bills coming due, investor anxiety is running high. Peter Hayes launches the first in a series of charts aimed at offering some solace (and an ode to municipal bonds).

It’s tax time and investors have any number of reasons to feel stressed: Equity markets are jumpy, bond yields have been defying expectations (again), global growth is disappointing, oil is on a slippery slope and, of course, taxes are eroding your income.

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Fortunately, we’ve got a chart (and some solace) for each of these. We’ll offer up one each week, now through the tax-filing deadline of April 18 (that’s right, three extra days in 2016, thanks to Emancipation Day closing IRS offices on Friday, April 15).

Our first installment focuses on the question that hits home right about this time every year: Are taxes taking too large a bite out of your investment income?

There’s one asset that can help ease that pain: municipal bonds. Munis seek to provide income that is free from tax (if they are not entirely tax free; federal, state, local, then we can’t say tax free), so you keep more of what you earn. These high-quality fixed income assets seek to provide higher yields than other bonds after taxes (and recently longer maturities have been outyielding Treasuries even before tax). The difference can be meaningful, and is not limited to the highest tax brackets. In today’s low-rate environment, even investors in the lowest tax bracket derive an income benefit from municipal bond tax-exemption.

Municipal bonds – The benefits of tax-exemption evident across tax brackets

Peter Hayes, Managing Director, is head of BlackRock’s Municipal Bonds Group and a regular contributor to The Blog.