Municipal money market funds can offer investors a number of advantages, and some of the biggest benefits with these funds is the special tax considerations which are given to them. Investors who find themselves in a high tax bracket, or those who just want to keep more of their money and pay out less in taxes, may find that municipal money market funds are an ideal choice for these purposes. These investments are very liquid, so you do not have to wait until a buyer can be found if you choose to sell your shares, and the tax advantages can be substantial. In some cases you may be exempt from local, state, and federal taxes on any returns that you earn with these investment choices, and this can add up over time.
When it comes to taxes and municipal money market funds, the federal government almost always exempts these earnings from federal capital gains or income taxes. The state government normally exempts all of these fund earnings when the municipality issuing the bond is in the state where the taxes would be owed, but this is not always the case. If you are not sure about the tax consequences on these investments where the state is concerned then you may want to talk to a professional or expert in this area before you make your final investment decisions. This can keep you from making a mistake which could result in taxes being owed, together with any applicable penalties and interest that may occur because of the mistake.
The guidelines when it comes to local taxes on earnings and returns from municipal money market funds is even more confusing at times, and can be tricky to navigate unless you understand the tax laws in your local city or town very well. Normally any earnings from a bond issued by a local municipality will be exempt from taxes in that locality, but will normally be taxed in other localities within the same state. This often results in investors that want to invest in municipal money market funds that hold local investments in the portfolio. Just like with the state tax question, if you are not sure whether or not taxes will be owed at a local level you should get professional tax advice on this subject before you make any final investment decisions.
Municipal money market funds can be a terrific investment choice, for many reasons including the tax optimization aspects of investing. These funds may be exempt from federal, state, or local taxes, or any combination of the three, depending on the municipal securities held in the fund portfolio. You can find these funds in a variety of types, from ones that only invest in United States municipal securities all the way to funds which only invest in local municipal securities, and each type will offer different tax advantages. As long as you are willing to do the research and take the time to compare these funds you can optimize your tax situation, so that you get to keep more of your money and put it to work for you instead of giving it to the tax man.
