Bond Funds Distribution and Taxes

[UnrealizedPotential]

I was wondering for those in Bonds how much taxes are each month for your distribution?Do you pay Federal and State tax on the distribution?If so,is it better to try to get the highest yield possible to offset that?Or,is it better to try to get one of the tax exempt Bond funds for Federal and just pay State tax?Fortunately for me I have time before I have to worry about this, but it is coming and I want to learn what I can.

[LOL!]

Thanks for asking. I don't pay any taxes on my bond fund distributions since all my bond funds are held in tax-advantaged accounts.

Non-tax-exempt bond fund dividends are taxed just like interest from a savings account or even wages. Bond fund capital gains are taxed like equity fund capital gains.

So maybe you can clarify your question a little bit. Do you do your own tax return each year?

More on munis: http://www.bogleheads.org/wiki/Municipal_bonds including links to tax-equivalent yield calculators for some math that you can do in your head.

[RunningBum]

The tax-exempt vs. taxable bonds question can only be answered by comparing rates and knowing your tax bracket. For example, if you are in the 25% bracket, and getting a 4% taxable bond rate, you'd need 3% tax exempt to match it. Less than 3%, you'd be better with taxable. More than 3%, tax exempt wins. If you are in the 33% bracket, the break-even rate becomes 2.67%. So take (1-tax rate) * taxable bond rate to get the break even tax exempt rate.

[Telly]

Quote:

Originally Posted by UnrealizedPotential I was wondering for those in Bonds how much taxes are each month for your distribution?Do you pay Federal and State tax on the distribution?............

We have both a taxable and a tax-exempt fund in our taxable area. A year or two ago we switched the dividends on the taxable to come to us as cash, the tax-exempt still has the dividends re-invested. No state tax here. The dividends from the taxable bond fund are, well, taxable, whether they are re-invested or not.

This may be obvious, but just in case it isn't, If you want to get a handle on taxes:
Assume a taxable bond fund investment of X$
Look up a bond fund that you are interested in, find the share price and divide it into the X$ amount to get number of shares.
Look at the recent distributions of the fund to see the $ per share per unit of time. Many/most are monthly distribution. Do the math to get your total $ distributions for the past year.
Then you need to include that with your other income. A little bit of time with a tax form will do it, or play with TurboTax or the like to get your final answer.

[LOL!]

If one is familiar with IRA withdrawals, then dividends from a bond fund are taxed like a withdrawal from a traditional IRA while dividends from a tax-exempt bond fund are usually taxed like a withdrawal from a Roth IRA. That's for federal income taxes, since state income taxes are usually different.