Investors should take note of some of the drawbacks or limitations of investing in municipal bonds. First, while the interest you receive from muni bonds is free from federal taxes there may still be state and local taxes depending on where you reside and where the bond was issued. The interest rate paid on muni bonds is also often quite a bit lower than rates offered on corporate bonds, so be sure to check the taxable equivalent yields before deciding which is better after-tax. Finally, if you receive Social Security, your bond interest will be counted as income in calculating the taxable amount of your Social Security income. That could increase the amount you owe.