Tax-free government bonds are typically available from stock brokerage firms, banks and the issuing government agency. The purchase outlets available depend on the type of tax-free bond, the issuing agency and the secondary market availability. Not all tax-free bonds are free from all taxes, including federal, state and local taxation authorities. Tax-free government bonds can affect a person's tax liability in other ways as well.Continue Reading
United States Treasury bills, notes and coupon bonds can be purchased through a licensed brokerage firm or directly from the Treasury. U.S. savings bonds can be purchased in the same manner but also through a bank or other licensed financial institution. Municipal bonds can be purchased directly from the municipality or through a stock broker. All of the bonds listed, except for savings bonds, can also be purchased from a brokerage firm in the form of a tax-free bond mutual fund, which is an amalgamation of several types of tax-free bonds designed to diversify the portfolio's risk.
All federal government issued bonds are typically taxable for federal income tax but tax-free at the state and local tax levels. Municipal bonds are typically tax-free at the federal, state and local levels. All tax-free bonds purchased from secondary markets such as brokerage firms and banks are free from specific income taxes but are taxable as capital gains when the bonds are converted into cash. Bondholders on Social Security should note that even though the income is not taxable, the amount of interest accrued affects the portion of the Social Security income that is taxable.Learn more about Business & Finance