Tax Advantages of State Bonds

State bonds provide investors with a nice alternative to other forms of investment and offer certain tax advantages. Here are some things to consider about the tax advantages of state bonds. 

State Bonds

State bonds are offered as a means to raise money for certain improvement projects. Private investors purchase state bonds for a certain face value. The state government then pays the investors an agreed-upon rate of interest over the life of the bond. Then at the end of the bond term, the investors can redeem their bond certificates for their original investments.

Tax Considerations

State bonds are a form of municipal bond that is issued by a public entity. With this type of investment, you are essentially lending money to a particular state government in return for a bond. The state government will then pay you a specified rate of interest for the duration of the bond's life.

With a state bond or any other form of municipal bond, you are not responsible for paying taxes on the interest that you accumulate. As a result of this tax advantage, many investors will overlook the relatively low rate of interest that is paid. 

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