Securities/ Bonds and Taxes

Post date: Mar 12, 2013 12:57:59 PM

Types of Bonds

All bonds fall into one of three broad categories:

- Government
- Corporate
- Municipal

Municipal Bonds

Municipal bonds are generally appropriate for high-income investors who are seeking to reduce their taxable investment incomes. The interest from these bonds is tax free at the federal, state and local levels as long as the investor resides in the same state or municipality as the issuer.

Savings Bonds

Series E and EE savings bonds are also state and local tax free, except that the interest on them may be deferred until maturity. Series H and HH bonds pay taxable interest semiannually until maturity. Series I bonds also pay taxable interest, which may be deferred like Series E/EE bonds. The interest from Series E and I bonds may also be excluded from income if the proceeds are used to pay higher education expenses. (For more insight, read The Lowdown On Savings Bonds.)

Government Bonds

The interest from Treasury bills, notes and bonds as well as U.S. government agency securities is taxable at the federal level only. Some agency securities, such as the Ginnie Mae - Government National Mortgage Association (GNMA), are also taxable at the federal level.

Although certificates of deposit (CD) can trade like bonds in the secondary market and are taxed in a similar manner, they are not considered to be bonds. The following is a breakdown of each type of debt.

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