The tax implications of bond yields vary across different types of bonds:
Corporate Bonds: Interest income from corporate bonds is subject to federal and often state income taxes, impacting the after-tax yield. Higher-income individuals may face higher tax rates.
Treasury Bonds: Interest from U.S. Treasury bonds is taxable at the federal level but exempt from state and local taxes. This tax advantage can enhance the after-tax return for investors.
Municipal Bonds: Interest from municipal bonds is typically exempt from federal taxes and, if the bond is issued in your state, may also be exempt from state and local taxes, offering tax-efficient income, especially for investors in high tax brackets and in-state residents.
Understanding these tax implications is essential for making informed investment decisions aligned with your tax situation and financial goals.