5.1 - Foundations of Taxation

What is a municipality?

State, city, county, or local government entity.

What are municipal bonds used for?

To fund public projects like roads, schools, and parks.

What are the 3 main types of municipal debt?

• General obligation bonds

• Revenue bonds

• Short-term notes

What do general obligation (GO) bonds fund?

Public projects that don’t generate revenue. (schools, parks)

What do revenue bonds fund?

Self-supporting projects that generate revenue. (toll roads, airports, venues)

What are short-term notes used for?

Temporary funding until expected money comes in. (like taxes)

💰 Taxation

How is corporate bond interest taxed?

Taxed at federal, state, and local levels. (fully taxable)

How is municipal bond interest taxed?

• Exempt from federal tax.

• Subject to state & local tax. (unless you live in issuing state)

What happens if you buy a muni bond from another state?

You pay state & local taxes on the interest.

How is U.S. government bond interest taxed?

• Taxed federally.

• Exempt from state & local taxes.

How is U.S. government bond interest taxed?

• Taxed federally

• Exempt from state & local taxes

How are U.S. territory bonds taxed?

Completely tax-free (federal, state, local) no matter where you live. FSL

Name the U.S. territories. (for bond questions)

• Puerto Rico

• Guam

• U.S. Virgin Islands

• American Samoa

• Northern Mariana Islands

Quick Memory Trick ⚡

• Corporate = taxed everywhere

• Municipal = no federal tax

• U.S. Gov = no state/local tax

• Territories = no tax at all