You work hard to build your portfolio. You should keep as much of your income as the law allows. That is the core argument for tax-free investing, and it starts with understanding how municipal bonds work.
Municipal bonds, or munis, have provided tax-advantaged income to investors for more than a century. The federal tax exemption for municipal bond interest has been in place since Congress established the permanent income tax in 1913. Today, the municipal bond market represents approximately $4.2 trillion in outstanding debt, with nearly 90% of newly issued bonds carrying tax-exempt status.
For investors in higher tax brackets, the math is compelling. A tax-free yield of 3.6% is equivalent to earning roughly 6.1% on a taxable investment for someone in the top federal bracket. That spread between what you see and what you keep can make a significant difference in your long-term wealth.
Firms like One Oak Capital Management, LLC, a New York based SEC registered investment adviser founded in 2013, specialize in helping investors access these opportunities through actively managed, investment grade municipal bond portfolios.
When state and local governments need to fund public projects, they issue municipal bonds. Think schools, highways, water systems, and hospitals. To encourage investors to buy these bonds and help communities finance critical infrastructure, the federal government exempts the interest income from federal taxes.
This exemption applies to most municipal bonds issued by state and local governments for public purposes. The result is straightforward: the interest you earn from qualifying municipal bonds does not count as taxable income on your federal return.
There is an important distinction to understand. The exemption covers interest income. Capital gains from selling municipal bonds before maturity or at a profit remain subject to capital gains taxes. Some bonds, particularly private activity bonds, may also be subject to the Alternative Minimum Tax (AMT). Your tax advisor can help you navigate these details based on your specific situation.
The headline yield on a municipal bond often looks lower than what you see on corporate bonds or Treasuries. That comparison is misleading without adjusting for taxes.
The tool you need is the tax-equivalent yield calculation. The formula is simple: divide the municipal bond yield by (1 minus your tax rate). This tells you what a taxable bond would need to pay to match the after-tax income of a muni.
Here is a practical example. Suppose you are in the 37% federal tax bracket. A municipal bond yielding 4% has a tax-equivalent yield of 6.35%. A taxable corporate bond would need to yield more than 6.35% to put the same income in your pocket after taxes.
The advantage grows even larger when you factor in the 3.8% Net Investment Income Tax (NIIT). This surtax applies to investment income for higher earners, but municipal bond interest is exempt from it. That effectively raises the top combined federal rate on taxable investment income to 40.8%, making the tax-equivalent yield on munis even more attractive.
For a married couple filing jointly in the highest bracket, a 4% tax-free yield is equivalent to approximately 6.76% on a taxable investment once you account for both federal income tax and the NIIT.
Tax-free income strategies can deliver significant value for investors in higher tax brackets. If you are in the 32%, 35%, or 37% federal brackets, the gap between tax-free and taxable income widens significantly.
High earners in states with elevated income taxes benefit even further. If you live in New York, California, New Jersey, or other high-tax states, you may also avoid state income taxes when you purchase bonds issued within your home state. This double exemption amplifies the effective yield advantage.
Retirees who want to generate steady income without pushing themselves into a higher bracket also find municipal bonds useful. The interest income does not increase your federal tax liability the way corporate bond income or dividend income does.
Business owners, professionals, and dual-income households often land in higher tax brackets without realizing the full impact on their investment returns. Calculating your tax-equivalent yield can reveal that a modest-looking municipal bond yield actually outperforms a higher-paying taxable alternative.
One Oak Capital Management, LLC applies an institutional approach to municipal bond investing that most individual investors cannot access on their own. The firm's investment team, led by CEO and Chief Investment Officer Stephen DiTursi with 40 years of industry experience, focuses on capturing value opportunities across the investment grade municipal bond market.
Senior Portfolio Manager Neil Crabb oversees the firm's municipal research process and trading systems. His team leads the strategic bond initiative and identifies opportunities for new product offerings. One Oak leverages an extensive network to access primary and secondary marketplaces, along with research tools including Bloomberg, Fabkom, and multiple sell-side firms.
The firm's Enhanced Municipal Portfolio is a laddered, actively managed strategy that consists of a diversified portfolio of high credit quality bonds designed for investors seeking tax-advantaged income. The portfolio has earned a 5-star Morningstar Rating and was awarded Zephyr's PSN Top Gun award for delivering a Top 10 return for the three-year period ending December 31, 2025, in the PSN Municipal Universe, which consists of 206 strategies across 93 firms.
(Disclaimer: References made to awards/rankings are not an endorsement by any third party to invest with One Oak and are not indicative of future performance. Investors should not rely on awards/rankings for any purpose and should conduct their own review prior to investing. Zephyr/PSN is an asset and wealth management software marketed by Informa (LSE: INF). PSN is a database of Separately Managed Accounts managed by Zephyr. One Oak does not compensate Zephyr for inclusion in the PSN database, nor does it compensate Zephyr for consideration for, or awarding of, the PSN Top Gun designation. The Morningstar Rating for Funds, often called the Star Rating, is a data-driven rating that measures the past performance of a fund in comparison to peers. One Oak has purchased the Morningstar Basics Package, which grants One Oak the permission to feature its Morningstar Rating in marketing materials. This purchase, renewed on an annual basis, has a value of $6,885.06.)
For investors who want lower interest rate sensitivity, the Enhanced Short-Duration Municipal Portfolio targets short-duration, high credit quality bonds designed for those seeking low volatility and attractive tax-advantaged yields.
One Oak Capital Management, LLC also offers the Enhanced Taxable Municipal Portfolio for investors seeking taxable income and total return through a combination of municipal and corporate bonds.
Each strategy operates within a disciplined portfolio risk management framework. The team constantly manages duration, monitors credit quality, and analyzes liquidity across every position. One Oak also executes tax-harvesting trades within these portfolios, adding another layer of tax efficiency for investors.
Because One Oak delivers these strategies through separately managed accounts (SMAs), you own the individual bonds directly. This structure gives you transparency, liquidity, and the ability to customize your portfolio by duration, income needs, and state-specific tax considerations.
The federal tax exemption applies broadly to qualifying municipal bonds regardless of where you live. State tax treatment varies, and the differences matter.
Most states exempt interest earned on bonds issued within that state from state income tax. If you live in New York and buy a New York municipal bond, you typically avoid both federal and state income tax on the interest. That combined exemption can be substantial for investors in high-tax states.
Some states, such as Florida and Texas, have no state income tax at all. For investors in these states, the state-level benefit of in-state bonds is less relevant as a result.
A few states tax municipal bond interest regardless of where the bond was issued. Others tax out-of-state bonds but exempt in-state issues. Understanding your state's rules is essential to maximizing your after-tax return.
One Oak Capital Management, LLC addresses this directly by offering portfolios that can be tailored to individual state requirements. Whether you need a single-state portfolio focused on New York bonds or a nationally diversified approach, the firm's SMA structure provides that flexibility along with ongoing tax management.
Tax-free income is a powerful tool. The difference between keeping 60 cents and keeping 100 cents of every dollar of interest income compounds meaningfully over time. Municipal bonds offer one of the few remaining legal ways to shelter investment income from federal, and potentially state, taxation.
The key is working with a firm that understands the municipal bond market at an institutional level. One Oak Capital Management, LLC brings over a decade of experience, a team of fixed income specialists, and a demonstrated track record in constructing high-quality, tax-efficient municipal bond portfolios.
To learn whether a tax-free income strategy fits your financial goals, visit One Oak Capital Management's website or contact the team directly to discuss your options. You can also explore the firm's latest thinking on market conditions through their Market Insights page.
Disclaimer: Past performance is not representative of future returns. Awards and rankings are not endorsements and are not indicative of future performance. Investors should conduct their own review prior to investing. To invest with One Oak Capital Management, LLC, you must be a qualified or accredited investor. One Oak makes no assertion about any particular comparable firm providing or any employee's previous employment / academic experience guaranteeing any particular knowledge, skill or service level. The content herein is for informational purposes only and should not be relied upon as investment advice. It is not intended to be (and may not be relied on in any manner as) legal, tax, investment, account, or other advice, or as an offer to sell or a solicitation of an offer to buy any securities of any investment product or any investment advisory service.
Any discussion of tax matters contained within this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or applicable state, local, or national tax law provisions; or (ii) promoting, marketing, or recommending to another party any transaction or tax-related matter addressed herein. Tax laws and regulations are complex and subject to change. The impact of a particular tax strategy will vary based on an individual investor's financial situation, investment portfolio, tax bracket, and other factors. Investors must consult with qualified tax professionals regarding their specific circumstances before implementing any tax strategy discussed in these materials.
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