Putting “no tax increase” in front of “bonds” is designed to dampen opposition to increased taxes, as it is with many political words. But, to be clear, there is no category of bonds issued by school districts that does not result in an increase in your taxes. Bonds with no tax increase raise your taxes.
How? Bonds are frequently issued by school districts to fund capital projects such as the construction of new facilities or the renovation of existing infrastructure. The bonds are paid off over time by the taxpayers, usually through an increase in their property taxes. Bonds are issued for a set period of time, and when they are paid off, the tax payments of the taxpayers are reduced.
Are bonds exempt from taxes?
State and local taxes are normally exempt from income from bonds issued by the federal government and its agencies, including Treasury securities.
If you own a bond mutual fund or ETF (exchange-traded fund), you’ll need to figure out how much income you earned from the fund’s government bond holdings (if any) in order to take advantage of this tax break when you file your taxes—it won’t show up on the tax forms your investment company sends you.
How do bond issues get funded?
You can decide, just like at home, that you need to build a new garage or rebuild the kitchen. The problem is figuring out how to pay for it. You might either pay with cash from your savings or take out a loan.
School districts confront similar challenges and have similar solutions. They may desire a new school or require renovations to an existing structure.
A common option for a school district to borrow money is to issue a bond, which functions similarly to a loan, and ask taxpayers for a Bond Levy, or a tax increase. The extra tax revenue is used to repay lenders or bondholders, as well as to pay interest on the loan.
Most of these levy requests must be approved by the state, especially if the state gives matching funds or contributes. The bond will be sold and administered by a bank or financial institution.
Voters provide their approval for a school district to raise taxes to pay for a loan or a bond.
The bonds, also known as IOUs, are sold by a financial institution and the proceeds are given to the school system.
The bond and interest are paid back to the bondholders by the tax money over a period of years.
Are school bonds tax deductible?
Because school districts pay interest on the initial investment, investors might profit when the district repays them. School bonds have a significant benefit over other forms of bonds in that they are free from federal and, in some cases, state taxes.
Are bonds subject to capital gains tax?
While interest income from municipal bonds is normally tax-free, capital gains from bond sales are subject to federal and state taxes. The difference between the selling price of the bond and the original purchase price of the bond is the short-term or long-term capital gain or loss on a bond sale.
Interest
Debt instruments such as bonds are a sort of debt instrument. When you purchase a bond, you are essentially lending money to the government or firm that issued it in exchange for interest. Over the course of their lives, most bonds pay a fixed, predetermined rate of interest.
That interest income could be taxed or not (more on the types of bonds that generate tax-free income later). In most cases, if the interest is taxable, you must pay income taxes on it in the year you receive it.
Bond interest is calculated at the same rate as other types of income, such as wages or self-employment earnings. There are seven different tax brackets, ranging from 10% to 37%. If you’re in the 37 percent tax bracket, your bond interest will be taxed at the same rate as your federal income tax.
Are bonds considered income?
You record interest from your bonds on your federal income tax return on the same line as other interest income, whether you report it at the end of the bond’s life or every year.
If you are reporting interest on bonds that belong to someone else (for example, interest on your child’s bonds), you must include it with other interest income on that person’s federal income tax return.
Even if you choose to report interest annually, the 1099-INT that is issued when the bond is cashed will include all of the interest earned since the bond was issued.
For information on how to record interest in this case on your federal income tax return, see IRS Publication 550.
Is it possible to lose money in a bond?
- Bonds are generally advertised as being less risky than stocks, which they are for the most part, but that doesn’t mean you can’t lose money if you purchase them.
- When interest rates rise, the issuer experiences a negative credit event, or market liquidity dries up, bond prices fall.
- Bond gains can also be eroded by inflation, taxes, and regulatory changes.
- Bond mutual funds can help diversify a portfolio, but they have their own set of risks, costs, and issues.
What is the source of bond money?
A bond is just a debt that a firm takes out. Rather than going to a bank, the company obtains funds from investors who purchase its bonds. The corporation pays an interest coupon in exchange for the capital, which is the annual interest rate paid on a bond stated as a percentage of the face value. The interest is paid at preset periods (typically annually or semiannually) and the principal is returned on the maturity date, bringing the loan to a close.