Municipal Bonds for a Single Filer: Yield and Risk

In 2026 a married couple filing jointly does not reach the 32 percent federal bracket until taxable income passes $403,550; a single filer reaches it at $201,775. The 35 percent rate follows the same pattern, beginning at $256,225 on a single return against $512,450 on a joint one. Income taxed at 24 percent on the returns you once filed with your husband can be taxed at 35 percent on a return of your own, and an exemption is worth more the higher the rate it shelters.

That is the case for a fresh look at municipal bonds. The case for a cool one is that the exemption reaches income tax and nothing else: not credit losses, not an early call, not the Medicare premium formula. After reading, you should be able to compute a tax-equivalent yield from your actual rates, check a bond on the Municipal Securities Rulemaking Board’s EMMA website, and decide between a fund and a ladder.

What the single-filer brackets do to the arithmetic

The IRS’s 2026 figures, published after the One Big Beautiful Bill Act (Public Law 119-21), keep the top rate at 37 percent, reached above $640,600 of taxable income for a single filer and $768,700 on a joint return. Below the top, the single thresholds for the 32 and 35 percent brackets are exactly half the joint amounts.

The change does not always arrive at once. IRS Publication 501 explains that the year of your husband’s death is the last year you can file jointly with him, and that a widow who has not remarried and has a dependent child may qualify as a surviving spouse for the two following years, which keeps the joint brackets. That status also carries the joint thresholds for the net investment income tax and, under Revenue Procedure 2025-32, the alternative minimum tax exemption, but the Social Security and Medicare income tests described below give a qualifying surviving spouse the single filer’s figures. Run the arithmetic for the year you are actually filing, and again for the year the single brackets will first apply.

IRS Publication 550 describes the net investment income tax as 3.8 percent of the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds $200,000 for a single filer, against $250,000 for a married couple filing jointly. Where that tax would reach additional taxable interest, it belongs in the comparison.

Computing a tax-equivalent yield you can rely on

A tax-equivalent yield is the taxable yield that would leave you the same after-tax income as a given tax-exempt yield. Its denominator needs the effective marginal tax rate on the comparable taxable bond, not a casual sum of every rate printed on your return. Work it in order:

1. Find your 2026 federal marginal rate on the next dollar of interest, not your average rate.
2. Test whether the next dollar of taxable interest would actually increase the net investment income tax under its lesser-of calculation. Include 3.8 percent only to that extent.
3. Model state tax on the taxable alternative and the municipal bond. Do not simply add the state rate to the federal rate: federal and state deductions, phaseouts and state-specific rules can change the combined marginal cost.
4. Divide the municipal yield by one minus that effective marginal rate, and compare the result only with taxable bonds of similar credit, maturity, liquidity and call terms.

Suppose a high-grade municipal bond yields 3.00 percent. If the comparable taxable interest faces only a 24 percent federal marginal rate, the tax-equivalent yield is 3.95 percent. At 35 percent it is 4.62 percent. If that same interest is also fully exposed to the 3.8 percent net investment income tax, the effective 38.8 percent rate produces 4.90 percent. Those are illustrations, not a substitute for a federal-and-state projection.

Two refinements. Publication 550 confirms that Treasury interest is exempt from all state and local income taxes, so leave the state rate out when the comparison is with Treasuries. For a callable bond, use the yield to worst, the lowest of the yields calculated to maturity and to the bond’s call dates, because the issuer chooses which you receive.

Price carries tax consequences too. Market discount on a tax-exempt bond is not tax exempt; for a bond bought after April 30, 1993, gain attributable to market discount is generally ordinary income. Publication 550’s de minimis rule treats the discount as zero when it is less than one-quarter of one percent of stated redemption price multiplied by the complete years from purchase to maturity, so record the purchase price and remaining term rather than guessing. Tax-exempt bond premium must be amortized, reduces basis and produces no deduction. Interest on money borrowed to buy or carry tax-exempt securities is generally not deductible, worth remembering before drawing on a securities-backed credit line.

In-state bonds and the question of residence

The SEC’s investor bulletin notes that municipal interest may also be exempt from state and local taxes if you reside in the issuing state, or if a U.S. territory issued the bond. State rules vary. If you divide the year between houses in two states, settle which one treats you as a resident before buying for the exemption; if your state has no income tax, an in-state bond earns no extra advantage.

A strong in-state preference also concentrates credit in one economy. The same bulletin observes that diversifying municipal holdings may help reduce risk, which can be worth a modest give-up in state savings.

Private activity bonds and the alternative minimum tax

A private activity bond is, broadly, a municipal issue whose proceeds go to private business use and whose repayment is secured by or derived from that use. Publication 550 explains that interest on a qualified private activity bond issued after August 7, 1986 is generally tax exempt but is a “tax preference item” that may be subject to the alternative minimum tax. Exceptions include qualified 501(c)(3) bonds, qualified bonds issued in 2009 or 2010, and certain housing bonds issued after July 30, 2008. Interest on one that is not qualified is simply taxable.

The single filer’s cushion is thinner. For 2026 the AMT exemption for an unmarried individual is $90,100 and begins to phase out at $500,000; a married couple filing jointly has $140,200, phasing out from $1,000,000. AMT-subject interest appears in box 9 of Form 1099-INT, or box 13 of Form 1099-DIV for a fund. If your preparer’s projection shows AMT exposure, favor bonds or funds that avoid such interest and price the yield you give up.

Four risks the exemption leaves in place

Credit risk. An issuer may fail to pay interest and principal in full. Defaults are generally rare, the bulletin notes, but not unknown; it cites Detroit’s 2013 bankruptcy filing and the 2017 bankruptcy-like process for Puerto Rico.

Call risk. Many municipal bonds are callable, and issuers tend to call when rates have fallen, leaving you to reinvest at lower yields. Read the call provisions first.

Interest-rate risk. Prices fall when rates rise. If the issuer neither calls nor defaults and the terms do not provide another outcome, a bond held to maturity pays its stated principal. That principal can still be less than what you paid for a premium bond; sell earlier and you may take a loss. Inflation compounds the problem for a fixed coupon, as our guide to inflation and a fixed income explains.

Liquidity risk. Many buyers hold municipal bonds to maturity, so a particular bond may trade rarely, and quoted prices for it can differ.

Tax-exempt describes one line of your return, not the character of the whole investment.

Reading a bond’s record on EMMA

EMMA is the official repository for municipal continuing disclosures and gives free access to official statements and reported trade data. The MSRB cautions that an official statement describes the initial offering, so read it alongside current ratings, financial filings and event notices.

SEC Rule 15c2-12 works chiefly through participating underwriters: for covered offerings, an underwriter generally must reasonably determine that the issuer or other obligated person has entered a written undertaking to provide specified annual financial information and notices of listed events to the MSRB. Audited financial statements are included when and if available, and some offerings are exempt. The due date and promised contents therefore come from the bond’s own continuing-disclosure agreement, not a universal calendar rule. On EMMA, compare that undertaking with what was actually filed and treat missing or chronically late disclosure as a due-diligence warning.

For price, the bond’s Security Details page shows its trades, and the Price Discovery Tool compares bonds with similar characteristics. Set your quote against both before you agree to it.

A fund or a ladder of individual bonds

A municipal bond fund offers diversification and professional credit work, and reports income in pieces: exempt-interest dividends in box 12 of Form 1099-DIV, the AMT-subject portion in box 13, and capital gain distributions, which Publication 550 treats as long-term capital gains. A national fund’s income from other states’ bonds may be taxable in yours; ask for its state-by-state breakdown.

A ladder of individual bonds, often in a separately managed account, lets you choose maturities, states, call structures and AMT exposure. A bond that reaches maturity without default ordinarily pays its stated principal, but a call can end the income stream early and a premium purchase can still lose principal relative to cost. The costs are less visible, a management fee plus dealer spreads inside the prices, and the ladder needs enough issuers to diversify credit. Whichever you choose, record the reasoning in a written investment policy.

What tax-exempt interest still counts toward

Publication 915 tests Social Security benefits by adding one-half of your benefits to all your other income, including tax-exempt interest. In the 2025 edition a single filer’s base amount is $25,000, and up to 85 percent of benefits can become taxable once that total, often called provisional income, exceeds $34,000. At the 85 percent ceiling, more income adds nothing to the taxable share; below it, model the effect, as our guide to how Social Security benefits are taxed explains.

Social Security’s operations manual defines the income used for Medicare’s income-related monthly adjustment amount, or IRMAA, as adjusted gross income plus tax-exempt interest from line 2a of Form 1040. For 2026 the threshold is $109,000 for single filers and $218,000 for joint filers, and 2026 premiums generally rest on 2024 returns, so interest added this year will generally count two years from now. Our guide to Medicare premiums after widowhood covers the tiers and appeals.

Tax-exempt interest is therefore included dollar for dollar in both provisional income and IRMAA MAGI even though it is excluded from regular federal taxable income. That does not make the two calculations identical: taxable interest also enters adjusted gross income, and the Social Security formula has its own thresholds and caps. Nor does the exemption reach every transfer: Publication 550 cautions that a sale can still produce a capital gain or loss, and that estate, gift or generation-skipping tax may apply to other dispositions of the bond.

Questions to ask before you buy

1. What effective federal-and-state marginal rate applies to the next dollar from the taxable alternative, and would that dollar actually increase the net investment income tax?
2. What is the bond’s yield to worst, and when can it be called?
3. Is it a private activity bond subject to the AMT, and does my projection show AMT exposure?
4. Is the interest exempt in my state of residence, and how much of my bond holdings already sits in that state?
5. What secures the payments, and are the issuer’s continuing disclosures current on EMMA?
6. How does my quote compare with recent trades in this bond and similar ones?
7. For a fund, what share of income is in-state or AMT-subject; for a ladder, what are the all-in costs?
8. How will the added interest change my provisional income and IRMAA income two years from now?

This article provides general U.S. educational information and is not legal, tax, or investment advice. Confirm current rules with the IRS, the Social Security Administration and your state tax agency, and with a qualified professional who knows your facts.