Q. I’ve heard that municipal bonds are no longer tax-free. Is that true? E.H., Bellingham, Wash.
A. No. Although there’s been talk in Congress of eliminating or reducing tax benefits associated with municipal bonds (“munis”), it hasn’t happened yet. Currently, the income generated by most munis is completely exempt from federal income tax, although certain “private activity” bonds may cause AMT complications. Note that adding investments in munis is also a way to avoid the new 3.8% Medicare surtax that can apply to “net investment income” collected by higher-income individuals beginning this year.
Tip: The tax breaks for munis extend to investment in municipal bond funds.