How much Capital Gains taxes do I have to pay on a Municipal Bond Fund when I sell it?

Question

I have a few CD's that pay me a small amount of interest each year. I report this on my income tax as interest income.

I am told if I invest my money in a Municipal Bond Fund I will not be taxed the same rate as interest income because this will be capital gains.

What percent will I have to pay on capital gains on my income tax?

What percentage is Social Security taxed at?

What about pension income? What percent?

Answer 1

Income from a municipal bond fund is of two types: interest income and capital gain. The interest income from such a fund is not taxed at the federal level. For this reason, municipal bond interest may be lower than what you can get in an investment that pays you taxable interest.

When you sell the fund, you will receive a statement from the fund company showing your basis, the sales, price, and the capital gains. Enter this information into your tax return. Any capital gain would be taxed at most 15%.

Your Social Security benefits may be partially taxed if your income (which will include that tax-free municipal bond interest) is greater than $25,000 (or $32,000 if married). The maximum amount of your benefits that can be taxed is 85%. The tax rate is your regular tax rate on your total income subject to tax.

Your pension income is also taxed at your regular tax rate. Your pension income plus your interest income (municipal bond or CD) will effect the tax on your SS income.

Answer 2

Interest from a Muni Bond fund is exempt from Federal taxes and may be exempt from state taxes.

I have owned a muni-bond fund for years and I have never been paid capital gains but, theoretically, it is possible. If I sold the fund at a gain, I would have to pay capital gains taxes (15%) and regular state taxes.

Social Security and Pension income are taxed as ordinary income (10%-35%) depending on the total. Note: All of your Social Security is not taxed. Only up to 85% of it.

Answer 3

Unfortunately, nobody knows. Capital gains tax is paid when you sell the investment. The rates are currently very low (no more than 15%), but the current law expires in a few years and no one knows if it will be renewed.