Tax-Exempt Sector

DEFINITION of 'Tax-Exempt Sector'

The market niche comprised of investment vehicles exempt from federal taxes. Nearly all investments in this area are municipal bonds, which cannot be taxed owing to the fact that U.S. law forbids the federal government from taxing debt issues offered by state and local government agencies. These tax exemptions offer investors incentives to purchase low-yield government bonds over higher yielding corporate fixed income securities.

BREAKING DOWN 'Tax-Exempt Sector'

Although most municipal bonds are tax-free, this is not always the case, as the tax status sometimes depends on what the bonds are being used for. In addition, many municipal bonds, as well as other tax-exempt investments, offer lower yields than taxable investment options.

RELATED TERMS
  1. Double Exempt

    The status accorded to municipal bonds for which interest is ...
  2. Municipal Bond Fund

    A mutual fund that invests in municipal bonds, or "munis." Municipal ...
  3. Municipal Bond

    A debt security issued by a state, municipality or county to ...
  4. Housing Bonds

    Debt securities issued by state or local governments to raise ...
  5. Fully Taxable Equivalent Yield

    The yield on a municipal bond, when the effect of reduced taxes ...
  6. Unlimited Tax Bond

    A municipal bond that is backed by the pledge of the issuer (generally ...
Related Articles
  1. Bonds & Fixed Income

    A Look at the Pros and Cons of Muni Bonds

    Considering muni bonds? Here's a look at their pros and cons.
  2. Bonds & Fixed Income

    Muni Bonds, Taxable Bonds or CDs: Which is Best?

    Here's how to tell if municipal bonds are a better investment than taxable bonds or CDs.
  3. Mutual Funds & ETFs

    Why You Should Invest In Municipal Bond ETFs

    These versatile instruments have become popular with investors in higher tax brackets and fill a specific niche in the wide selection of fixed-income offerings.
  4. Mutual Funds & ETFs

    4 Tax-Free Muni Bond ETFs to Consider

    Tax free municipal bond ETFs are an excellent way to build wealth slowly. Here are 4 you should consider.
  5. Bonds & Fixed Income

    The Top 5 Municipal Bond Funds for 2016

    Understand how the addition of municipal bond mutual funds can enhance a portfolio, and learn the top-rated municipal bond funds to consider for 2016.
  6. Bonds & Fixed Income

    Should You Consider Muni Bonds?

    Municipal bonds come in two types. General obligation bonds repay their holders through taxes. They often have low interest rates, but they’re safe.
  7. Bonds & Fixed Income

    The Basics Of Municipal Bonds

    Investing in these bonds may offer a tax-free income stream but they are not without risks.
  8. Taxes

    Taxation Rules For Bond Investors

    Several factors affect the taxable interest that must be reported. Learn more here.
  9. Retirement

    3 Tax-Reduction Strategies for High-Net-Worth Investors

    Learn about three tax strategies that reduce taxable income and minimize the share of taxes paid on employer-sponsored and individual investment accounts.
  10. Mutual Funds & ETFs

    3 Best High-Yielding Municipal Bond Mutual Funds (NHYMX, PYMDX)

    Discover the benefits of including municipal bond funds in your investment portfolio and learn about three high-yielding municipal bond mutual funds.
RELATED FAQS
  1. How are municipal bonds taxed?

    Discover information about trading municipal bonds, specifically the various tax implications municipal bonds have at state ... Read Answer >>
  2. What do cities do with the funds generated from municipal bonds?

    Learn more about municipal bonds, including the various types of bonds issued and the purposes of municipal bond funds, such ... Read Answer >>
  3. What is the difference between municipal bonds and standard money market funds?

    The primary difference between municipal bonds - also known as "munis" - and money market funds is that municipal bonds are ... Read Answer >>
  4. How do the returns on municipal bonds compare to those of other bonds?

    Learn how tax-free municipal bonds may provide better returns than other types of bonds, and understand the risks of municipal ... Read Answer >>
  5. What is a triple tax-free municipal bond?

    At its core, a triple tax-free municipal bond is just like any corporate bond: it is a debt instrument, a loan given to a ... Read Answer >>
  6. What is the difference between a state income tax and a federal income tax?

    Learn the difference between state income tax and federal income tax based on tax rates, deductions, tax credits and taxable ... Read Answer >>
Hot Definitions
  1. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  2. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  3. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  4. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  5. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  6. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
Trading Center