There are many other potential problems associated with municipal bonds, including interest rate risk, and although they are federally tax-free, other state and local taxes may apply and interest income may be subject to the alternative minimum tax.

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The first 25% of these payments is tax free with the rest added to any other taxable income received in the year.

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This is because the interest from munis is generally income tax free, as it is not with the other class of bonds.

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