Funds that exclusively hold U.S. Treasury bonds may be exempt from state taxes. The interest that your savings bonds earn is subject to federal income tax, but not to state or local income tax any federal estate, gift, and excise taxes as well as any state estate or inheritance taxes. Talk to a tax advisor for more information about the rules in your state. All Rights Reserved. Interest on corporate bonds is taxable, but some government bonds may be exempt from certain taxes. All information you provide will be used by Fidelity solely for the purpose of sending the email on your behalf. The subject line of the email you send will be "Fidelity.com: ". Think Roth. Interest income generated by municipal bond funds is generally not subject to federal taxes, and may also be exempt from state and local taxes if the bonds held by the fund were issued by the state in which you live. If taxable bond funds or individual bonds are held in a tax-free account such as a Roth IRA, then the income from them would be free from federal taxes, provided certain requirements are met. For example, if you’ve held a savings bond for 10 years and elected to defer any taxes on the interest until you cashed it in, all 10 years of interest are taxable in the same year. The interest on EE bonds isn’t taxed as it accrues unless the owner elects to have it taxed annually. The income from taxable bond funds is generally taxed at the federal and state level at ordinary income tax rates in the year it was earned. While you will want to consider a fund’s total return when evaluating it as an investment, keep in mind that the stated historical return of a fund is usually expressed as a pretax number. This is sometimes called "gross roll up". A capital gain is tax terminology for a profit. Income earned from a bond issued by another state is taxable only if such other state … What’s more, since fund managers regularly buy and sell bonds, there may also be capital gains and losses incurred. Some definitions explained. Like other investments, the tax owed on bonds and bond funds can be deferred by holding them in a tax-advantaged retirement account, such as a 401(k) or IRA. The interest on EE bonds isn’t taxed as it accrues unless the owner elects to have it taxed annually. Whether they're issued at the federal, state, or local level, all government bonds have some sort of tax exemption. Income from bonds issued by state, city, and local governments (municipal bonds, or munis) is generally free from federal taxes. The main differences are that unlike UK bonds, the funds you invest in are not taxed directly by HMRC. If you bought the bond when it was issued at its original issue price and hold it until maturity, you generally will not recognize a capital gain (or loss). Mutual funds that invest in bonds typically provide regular income from a portfolio of many securities. Using the money for higher education may keep you from paying federal income tax … Mutual funds are typically more diversified, low-cost, and convenient than investing in individual securities, and they're professionally managed. Votes are submitted voluntarily by individuals and reflect their own opinion of the article's helpfulness. The interest on EE bonds isn’t taxed as it accrues unless the owner elects to have it taxed annually. LTCG arising from sale of bonds (listed and unlisted) are taxable under section 112 at the rate of 20 percent. The interest on EE bonds isn’t taxed as it accrues unless the owner elects to have it taxed annually. Learn about bonds, CDs, bond funds, and other investments. Withdrawals of up to 5% a year are allowed for up to 20 years without incurring an additional tax charge. Fidelity does not provide legal or tax advice. A percentage value for helpfulness will display once a sufficient number of votes have been submitted. Whether the profit from the sale of a bond in the fund is taxed at ordinary income tax rates or is eligible for a reduced capital gains rate is dependent on the same factors as explained above. Bonds and bond funds are taxed in 2 ways—based on the income that's distributed and on any gains if the investment is sold at a profit. See guidance that can help you make a plan, solidify your strategy, and choose your investments. According to Treasury Direct, interest from EE U.S. savings bonds is taxed at the federal level but not at the state or local levels for income. Municipal bond income is also usually free from state tax in the state where the bond was issued. 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