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Tax-Reduction Strategies Municipal Bonds Issued by a government agency or municipality to fund projects "for the public good," such as to improve roads or build hospitals. May be purchased as individual issues or through mutual funds. Exempt from federal income taxes and may also be exempt from state income taxes in the state that issued the bond. See Municipal Bonds in the Investment Types Workshop.   Quick Question Question: Sally, who is in a 25% tax bracket, has $10,000 sitting in a bank account paying 2%. She does not need this money for at least five years. Why should she consider repositioning these funds to a municipal bond? Her money in the bank is only earning her 1.5% after taxes. If she invests in a municipal bond that pays 4%, her after-tax return is still 4%. A.   Bank Account Paying 2% Municipal Bond Paying 4% Before-tax earnings $ 300 $ 400 Income taxes $ 81 $ 0 After-tax earnings $ 219 $ 400 B.   Bank Account Paying 2% Municipal Bond Paying 4% Before-tax earnings $ 200 $ 400 Income taxes $ 54 $ 0 After-tax earnings $ 146 $ 400 C.   Bank Account Paying 2% Municipal Bond Paying 4% Before-tax earnings $ 400 $ 500 Income taxes $ 140 $ 0 After-tax earnings $ 260 $ 500 D.   Bank Account Paying 2% Municipal Bond Paying 4% Before-tax earnings $ 200 $ 400 Income taxes $ 0 $ 0 After-tax earnings $ 200 $ 400 Don't look at what you're getting paid -- look at what you're getting to keep! < PREVIOUS NEXT > #40101