Municipal Bond Forum
Yield vs. taxes
Q
Assuming an investor’s objective is tax-free income and he lives in a state with an income tax of 5%, do you recommend investing in one’s own state offerings in order to enjoy tax exemption at the state level, or investing in other states’ offerings if the yield is higher? If you agree with the second option, is there any minimum difference in yield between the best offering in one’s own state vs. that in another state that you think must be exceeded before going through the hassle of paying state taxes?
A
James A. Klotz responds:
This question comes up frequently. The answer, however, depends on your personal inclination. As you suggest, buying out-of-state bonds can often provide a higher “net” yield, even after accounting for your state tax. Whether taking advantage of this additional yield is worth the “hassle” is really up to you.
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