A reminder for municipal bond investors

Who doesn't hate to pay taxes? Many retirees choose tax-exempt municipal bonds so that the interest they receive is free from federal, state and local taxes. Corporate bond interest disbursements are usually fully-taxed and Treasury securities are generally taxed only at the state level if the particular state has an income tax). But it's not that simple when it comes to how state and government bonds are counted for other purposes.

It's true that Interest on state and local government bonds is not included in gross income. But tax-exempt interest is added back to determine the modified adjusted gross income that is used to compute tax on Social Security benefits, the Medicare premium surtax, the 3.8% net investment income tax, and others. Keep this in mind when choosing to receive a lower interest rate return from "tax-free" vs. usually higher interest rate return taxable investments...