In Pennsylvania, dividend income is taxed at a rate equal to 100 percent of the capital gain. For Pennsylvania personal income tax purposes, exempt interest dividends received from states other than Pennsylvania, or from exempt federal commitments, are taxable income.
Is tax-exempt interest taxable in PA?
Interest that isn’t taxed. Pennsylvania, its political subdivisions and authorities or the United States government do not have to pay taxes on interest earned from their direct debts. Bonds and federal treasury banknotes and notes are exempt from taxation as are interest payments from Series E through H.
Is exempt interest taxable?
Income from interest that does not trigger a federal tax liability is referred to as tax-exempt interest. Roth retirement accounts and municipal bonds are the most prevalent sources of tax free interest.
Do tax-exempt dividends count as income?
A mutual fund dividend that is exempt from federal income tax is known as an exempt-interest dividend. Municipal bond mutual funds are frequently linked to exempt-interest dividends. However, exempt-interest dividends may still be taxable to state income tax or the alternative minimum tax, even if they are not subject to federal income tax (AMT). Dividends are taxed as ordinary income and must be reported on Form 1099-INT, which is issued by mutual funds.
What income is not taxable in Pennsylvania?
All Social Security and retirement account payments, such as 401(k)s and IRAs, are completely excluded in Pennsylvania. Pension income for those above the age of 60 is also free from this tax.. Its property tax rates are greater than the national average, yet it has one of the country’s 20 lowest average total sales taxes.
Is municipal interest taxable in PA?
There are several factors to consider when deciding whether or not to invest in municipal bond funds. ETFs that invest in National Muni Bonds are a low-cost and straightforward option for investors. However, municipal bond closed-end funds (CEFs) might be a more attractive investment option when they are trading at a discount to their portfolio’s net asset value. This article, written exclusively for Pennsylvanians, compares the best municipal bond mutual funds and CEFs in the state to the best nationwide ETFs and CEFs.
Income Taxes in Pennsylvania.
Federal income tax does not apply to interest earned on municipal bonds.
Interest earned on municipal bonds issued by local governments or even the state itself is generally not subject to taxation in most states.
Currently, the state of Pennsylvania (PA) has a 3.07 percent flat income tax rate.
National muni bonds and PA muni bonds are compared in this article to see how attractive they are to investors in Pennsylvania.
The yields of the PA-specific municipal funds have been inflated by 3.07 percent in order to make comparisons fair.
Muni Mutual Fund of Pennsylvania
Vanguard Mutual fund VPAIX invests in municipal bonds issued by Pennsylvania municipalities for long-term tax-exempt purposes. The Bloomberg Barclays PA Muni Fund Index serves as the benchmark for this actively-managed fund. It has an extremely competitive cost-to-income ratio. 17% of the total. VPAIX had a yield of 3.25 percent as of May 31, 2019. An adjusted yield of 3.35 percent is obtained by adding 3.07 percent to the gross yield. The fund has a 4.8-year life span. Due to its low expense ratio, minimal turnover, and excellent tracking of the PA muni market, this is our top mutual fund for PA munis in the state.
Endowment for Pennsylvania Municipalities
Nuveen Pennsylvania Municipal Value Fund is now our preferred municipal bond CEF in Pennsylvania (NPN).
This is why we enjoy it:
- Using our patented CEF return predicting algorithm, we expect a high residual return.
ETFs for municipal bonds in the United States. For the sake of comparison, we’ll use two ETFs that we’ve previously highlighted for their substantial liquidity and cheap costs: the iShares National Muni Bond ETF (MUB) and the Vanguard Tax-Exempt Bond ETF (VTEB). As passively managed index funds based on S&P National AMT-Free Municipal Bond Indexes, their features and holdings are almost identical. We also add iShares iBonds Sep 2020 Term Muni Bond ETF (IBMI) to reflect the short end of the national muni market in our definition of the muni yield curve.
The CEF of the National Municipality.
AllianceBernstein National Municipal Income Fund, our current favorite national muni CEF, is also included in this analysis for comparison’s sake (AFB).
CEF AFB has a substantially larger duration than the two basic national ETFs, VTEB and MUB. Like other national muni CEFs.
National Parks and Recreation’s NAV discount.
May 31, 2019, NPN’s price was $13.85, its NAV was $15.17, and it was selling at a discount of 8.7%.
For $13.85, you get $15.17 worth of value.
That NAV is a rock-solid investment.
AFB’s portfolio isn’t subjective or tough to value.
It is made up of municipal bonds that are traded on the open market.
It doesn’t matter if the NAV discount never disappears; investors still benefit from the economic value and cash flow generating capabilities of the full $15.17.
AFB’s dividend rate would have been 3.20 percent instead of 3.51 percent if it had been trading at its NAV of $15.17 on May 31, 2019.
That’s an extra.31 percent in yield merely by purchasing at a discount!
NAV Discount is a measure of value.
Our proprietary criteria are just too numerous to go into detail here.
We will, however, take a closer look at the one that we believe is the most critical: the NAV Discount.
Investing in a CEF at a discount to its net asset value (NAV) is a clear value strategy.
Our research shows that the NAV discount factor is the most important CEF selection criterion we have available to us.
This factor was the subject of one of our studies, as shown in the graph below.
NAV data was initially made accessible in FactSet at the end of 2012.
We create a “Top 5” portfolio of the five CEFs with the greatest NAV discounts at the conclusion of each month.
Each is 20% heavier than the other.
The “Top 5” portfolio is re-selected and rebalanced at the end of each month based on the residual return of this portfolio.
Each month we also build a “Bottom 5” CEF portfolio by picking and rotating through five CEFs that have a negative NAV discount and re-selecting each month.
Model as a whole.
The results of our overall return forecasting model in the closed-end muni fund universe are presented below.
It takes into account the distribution yield as well as the influence of all of the parameters we use to forecast residual returns.
Monthly rebalancing of the five single-state muni CEFs with the highest total return projections yields the blue line. This is the cumulative log total return (not residual return).
Log total return has been averaging 9.0 percent per year since 2012.
Investors should focus on those five stocks that have the lowest (or most negative) total return estimates.
This was a loss of -87.7%.
In the green line, the technique is implemented in a long-short manner.
Its annual rate of return is 17.6%.
Long and short term, the outcomes have been solid and constant.
The superiority of CEFs cannot be overstated.
In terms of yield/risk, the PA mutual fund VPAIX and the PA closed-end fund NPN have already proven to be more appealing than the main national muni ETFs VTEB/MUB.
A comparison of their total return versus risk is shown in the graph below.
The two CEFs are clearly superior than the ETF and mutual fund alternatives because of our exclusive CEF alpha projections.
Choice is contingent upon future expectations for interest rates.
The yield/risk tradeoffs can be shown in this image.
In terms of overall return/risk, NPN (which is a PA CEF) appears to be an excellent investment option.
In terms of total return, AFB (a national CEF) has a substantially better projection, but its duration is also quite a bit longer.
Investors may choose between NPN and AFB depending on how much interest rate risk they are willing to take, as well as their expectations for interest rate changes.
NPN is a good choice for investors who expect that interest rates will rise in the future.
AFB is a good choice for investors who expect that interest rates will continue to fall.
Is municipal bond interest taxable in Pennsylvania?
A municipal bond fund that invests entirely in Pennsylvania municipal bonds is exempt from taxation. Even if the municipal bond fund is invested in municipal bonds from other states, any interest in that fund is taxable when it is sold.
How do I report tax-exempt interest?
For municipal bonds, each payer should issue you a Form 1099-INT or 1099-OID if you received any tax-exempt interest (including any tax-exempt OID)… There are a few exceptions to this rule, but generally speaking, your tax-exempt stated interest should appear in box 8 of Form 1099 INT or box 2 of Form 1099-OID, and your tax-exempt OID should be in box 11. Line 2a of your Form 1040 or 1040-SR should contain the total. Only report the net amount of tax-exempt interest if you paid a premium for a tax-exempt bond on your Form 1040 or 1040-SR (that is, the excess of the tax-exempt interest received during the year over the amortized bond premium for the year). Line 2a of your Form 1040 or 1040-SR should only include the net amount of tax-exempt OID if you purchased the bond at an acquisition premium (that is, the excess of the tax-exempt OID for the year over the amortized acquisition premium for the year). You may find out more about OID and bond premium in Pub. 550.
In addition, any exempt-interest dividends received from a mutual fund or another regulated investment organization should be included on line 2a of your Form 1040 or 1040-SR. Box 11 on the 1099-DIV should display this amount.
What qualifies for tax-exempt interest?
Any interest collected and credited to an account qualifies as tax-exempt interest income. During the year in which the option was available, you may withdraw your money without incurring any penalty. As a result, it is exempt from both federal and state taxes.
Municipal bond interest income is exempt from federal and state taxes. Investing in government-issued municipal bonds, whether from a city, county, or the District of Columbia, is tax-free. Income from municipal bonds issued within a state’s borders is exempt from state income tax.
Savings bond interest and insurance dividend interest paid to the Department of Veteran Affairs are two other instances of tax-free interest income. Interest income from the Treasury is therefore federally taxable but not subject to local or regional taxes.
Ordinary dividends, capital gains and non-dividend distributions, and undistributed capital gains interest make up tax-free mutual fund distributions. For the most part, don’t factor in interest from retirement accounts like IRAs and health savings accounts like Health Savings Accounts.
Even if you didn’t receive Forms 1099-INT or 1099-OID, you must still declare all taxable and tax-exempt interest on your tax return, regardless of whether you received them.
How do I report exempt interest dividends?
In addition, any exempt-interest dividends you receive from a mutual fund or other regulated investment organization should be included on line 2a of your Form 1040 or 1040-SR. Box 11 of Form 1099-DIV should include this amount.
What is taxable PA?
Physical goods, such as furniture, household appliances, and automobiles, are subject to sales tax in Pennsylvania.
All medicines, food, fuel, and clothing, whether prescribed or not, are exempt from taxes.
In Pennsylvania, there is a sales tax on some services. The Pennsylvania Department of Revenue has compiled a comprehensive list of taxable services.
