Muni Bond tax question

Hi Im confused on how and when Muni bond should be taxed. Thank you.

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Hi @Lonely_pink_mole - good question. You don’t happen to have the question ID for this question, do you? You can copy the question ID by clicking the link at the top right of each question.

For example:

I searched our question bank for this question and could not find it (we have thousands of questions in our bank). I’m looking for this specific question because it seems there’s a typo. This question should be for a corporate bond fund, not a municipal bond fund.

To answer your question - dividends from municipal bond funds are generally exempt from federal taxes, but potentially subject to state and local taxes. If the bonds in the fund are not from the state where the investor resides, they are subject to state and local taxes (e.g., an investor in Colorado invests in a municipal bond fund that holds Alabama municipal bonds). There’s clearly not enough information in this question to determine this.

Capital gains on municipal bonds or bond funds are fully taxable. This investor redeems the bond fund at a $13,000 capital gain, which is fully taxable (federal, state, and local taxation). This gain is short term (1 year or less), so the investor would be taxed at their tax bracket (32%). If it were a long-term gain (holding shares for more than 1 year), they would pay a 15% capital gain tax. Long-term capital gains are taxed at either 15% or 20% (only those at the 34% and 37% tax bracket pay 20%).

I hope this answers your question. If you find the question ID, please post it and I’ll make sure the question is updated.

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We just found the question and made the necessary updates. Please let me know if you have any other concerns.

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Oh Sorry for late reply. Thank you!

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