All bonds issued by the Government of Puerto Rico, or by its authority, are exempt from taxation by the United States, the Government of Puerto Rico, or any political or municipal subdivision thereof, or any State, Territory, or possession, or any county, municipality, or other municipal subdivision of any State, Territory, or possession of the United States, or the District of Columbia.
Are municipal bonds in Puerto Rico tax-free?
Federal, state, and local taxes are not levied on bonds issued by the government of Puerto Rico and its subdivisions (so called “triple tax exemption”). Unlike other triple tax-exempt bonds, however, Puerto Rican bonds maintain their exemption independent of the bond holder’s location. This has made Puerto Rican bonds very appealing to municipal investors, who may benefit from owning a bond issued by a state or municipality other than their own. This benefit seeks to overcome the limitation imposed by municipal bonds with triple tax exemptions, which only apply to bond holders who live in the state or municipal subdivision that issues them.
This, among other factors, prompted Puerto Rico to issue bonds totaling US$71 billion, or roughly 68 percent of the island’s gross domestic product (GDP). Puerto Rico’s government debt crisis was precipitated by these acts, as well as a sequence of negative cash flows and a downturn.
Which bonds are tax-free in the state?
Federal income from state, city, and local government bonds (municipal bonds, or munis) is normally tax-free. However, you must record this income when you file your taxes.
In most cases, municipal bond income is tax-free in the state where the bond was issued. However, take in mind the following:
- Occasionally, a state that normally taxes municipal bond interest would exempt special bonds when they are issued.
Municipal bond income may potentially be free from local taxes, depending on your state’s regulations. For further information on the rules in your state, see a tax advisor.
Is the interest on municipal bonds taxable to the state?
Residents of the issuing state are generally excluded from federal and state taxes on income earned from municipal bonds. While interest income is tax-free, any capital gains delivered to the investor are taxable.
Are bonds issued by Puerto Rico quadruple tax-free?
Given that statehood for Washington, D.C. is also on the table, the proposal has gained more general attention this year, both positive and negative.
The loss of Puerto Rico’s unique triple-tax-exemption would be one of the most significant consequences of statehood.
Any new bonds issued by a state of Puerto Rico would not be subject to the tax exemptions from local, municipal, and federal taxes that have attracted many US investors in the past.
Are bonds issued by Puerto Rico tax-free in New York?
A municipal bond issued in New York, for example, will be free from New York state income tax. We won’t be able to go over examples involving each state because there are 50 states plus D.C. and territories like Puerto Rico, the US Virgin Islands, and Guam.
Is it true that Puerto Rico bonds pay interest?
Spain occupied Puerto Rico beginning in 1493, when Christopher Columbus arrived on the island. Puerto Rico was ceded to the United States after the end of the Spanish–American War in 1898. The US then refused to pay the colony’s creditors, claiming they were owed a dreadful amount.
Before 1898, the people of Puerto Rico had Spanish citizenship; after 1898, the people of Puerto Rico did not have either independent nor colonial citizenship. President William McKinley signed the Foraker Act in April 1900, allowing only the House of Representatives of Puerto Rico to be elected by popular vote. Puerto Rico was characterized as an unincorporated “territory appurtenant and belonging to the United States, but not a part of the United States under the revenue clauses of the Constitution” in the Insular Cases, a series of Supreme Court decisions from the early 1900s.
Although legally defined as a commonwealth or protectorate, Juan R. Torruella considered Puerto Rico’s relationship with the United States to be colonial because the US Federal Government has ultimate economic and political decision-making authority and Puerto Rican citizens do not have full constitutional rights. Puerto Rico is subject to US legislation due to its political position. One of these laws is the Jones-Shafroth Act, which exempts interest payments from bonds issued by the government of Puerto Rico and its subdivisions from federal, state, and municipal income taxes (the so-called “triple tax exemption”), regardless of the bondholder’s location. Puerto Rican bonds were appealing to municipal bond investors because of this right. Because of this, Puerto Rico was able to issue bonds that were always attractive to municipal investors, regardless of the state of the island’s finances. As a result, Puerto Rico began issuing debt to cover its expenses, a practice that it has continued since 1973. The island also started issuing debt to pay off earlier debt, as well as refinancing older debt with low interest rates with debt with higher interest rates.
Puerto Rico was officially prohibited from declaring bankruptcy under Chapter 9 of Title 11 of the United States Code by Congress in 1984. Congress withdrew the tax credits between 1996 and 2006, resulting in the loss of 80,000 employment on the island and caused its population to drop and economy to contract in all but one year since the Great Recession began. Because Puerto Rico’s constitution stipulates that “all available resources” must first be used to pay the Commonwealth’s general obligation bonds, the Commonwealth began issuing Puerto Rico Sales Tax Revenue Bonds in 2006 to circumvent the constitution’s restrictions by being paid directly into a separate urgent interest fund. The sales tax has been raised to 11%. In 1958, the last property tax assessment was completed. Between February 4 and 11, 2014, three bond credit rating agencies downgraded Puerto Rico’s bonds to non-investment grade (commonly known as “junk status” or speculative-grade) when the island’s outstanding debt reached $71 billion, roughly equal to 68 percent of GDP. Bond acceleration clauses were activated as a result of the downgrading, requiring Puerto Rico to repay some debt instruments in months rather than years. Investors were fearful that Puerto Rico might default on its debt at some point. Puerto Rico’s ability to issue bonds in the future would be harmed if it defaulted. Puerto Rico now claims that it will be unable to maintain current operations unless dramatic actions are taken, which could result in public upheaval. Protests against the austerity measures have already taken place. Puerto Rico’s present debt problem is the result of these events, as well as a succession of governmental financial deficits and a recession.
What are the tax-free municipal bonds?
If municipal bonds ETFs hold exclusively tax-exempt bonds, they are normally tax-free on both the federal and state levels. However, if the municipal bond ETF includes both tax-free and taxable interest, federal and state taxes may be required.
Are bonds exempt from taxes?
Tax-free bonds pay interest that is not subject to income tax. It’s important to remember that selling tax-free bonds on the secondary market will result in capital gains tax. If you sell them within a year of buying them, you’ll have to pay tax on the gains according to your tax bracket.
In a trust, are municipal bonds tax-free?
Interest income derived from municipal bonds is given unique status under federal tax law. Municipal bonds, unlike other types of interest income, provide bondholders with tax-free income. Municipal bond interest payments can be held or distributed tax-free by a trust fund that holds the bonds. It is not allowed to deduct any interest costs incurred while purchasing bonds with borrowed funds. As a return of investment, any principal payments from bonds are also tax-free.
Are state and federal taxes excluded from municipal bonds?
Nobody enjoys paying taxes. Municipal bonds (sometimes referred to as “munis”) are fixed-income investments that offer better after-tax returns than comparable taxable corporate or government issues. Interest paid on municipal bonds is generally excluded from federal taxes and, in some cases, state and local taxes as well.