A triple exemption is a type of bond or bond fund that is not subject to federal, state, or local taxes. Municipal bonds as well as other types of bond issues may be structured as w triple exemption. The process means that no taxes are withheld from the dividend or interest payments associated with the bond.
It is important to note that the triple exemption is not a mechanism that applies to every bond or bond issue. Many bonds are indeed subject to taxes on every level. Other bonds may be subject to federal or state taxes, but be exempt as far as local taxes. When investing in bonds, investors should make sure to read the terms and conditions that apply to the bond issue thoroughly, so there will be no misunderstandings about the type and amount of tax liability involved.
Another aspect to keep in mind with a triple exemption is that the process is not available in every locality. That is, the location of the entity issuing the bond may determine whether or not the bond may carry a triple exemption. In other localities around the world, the legal residence of the investor may be the determining factor as to how many levels of exemption are actually in force with the bond issue. Understanding local regulations regarding investments will help the investor to comply with applicable tax laws and avoid penalties at a later date.
In situations where there are no barriers to the issuance of a triple exemption, the process of managing the bond issue is greatly simplified. There is no need for the issuer of the bond to withhold taxes and forward them to the appropriate tax agency. Likewise, the investor receiving the dividend or interest payment does not have to be concerned about calculating and paying applicable taxes on any proceeds received from the investment.
Investors who like to make use of bond issues as part of their overall investment strategy may find that locating bond funds that include bonds with triple exemptions is not that hard to do. Many municipal bonds make use of this approach. By working closely with a broker, it is possible to identify bonds that are configured with a triple exemption and will also yield an appreciable amount of return on the investment.
