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The best time to do your tax planning is immediately. One great way of reducing your taxes is putting your surplus funds in stocks that pay tax free dividends.

There are many stocks, which are primarily closed end funds or CEFs, which pay dividends that are tax free. This tax free income is generated from municipal bonds in the portfolio. Although many of the Canadian oil income trusts pay income that may be partially or completely tax deferred due to depletion and depreciation deductions, the tax free stocks that invest in munis usually generate dividends that are completely exempt from Federal taxes, and may be exempt from state income taxes.

Municipal bonds are issued by states, counties, cities, and other governmental agencies. Income from these bonds is exempt from Federal income taxes, and if the bonds are issued in your state of residence, the income is exempt from state income taxes also. Municipal bonds issued by Puerto Rico and other U. S. dependencies are exempt from state income taxes for residents of most states. There are over 200 different tax free income stocks, according to the recently updated list at WallStreetNewsNetwork.com, with 37 of them yielding 7% or more. Just be cautious about investing in extremely high yield muni CEFs which may use leverage to attain their high yields.

Eaton Vance Municipal Income Trust (NYSE:EVN) is one of the highest yielding CEFs, currently paying 7.8%. It has paid dividends since 1999.

For you New Yorkers, there is the PIMCO New York Municipal Income Fund II (NYSE:PNI) which pays 7%. It has paid quarterly dividends since 2002.

If you live in California, you might want to consider the BlackRock California Municipal Income Trust II (BCL) which also yields 7%. The fund has been paying dividends monthly since 2002.

Although none of the Massachusetts funds pay 7%, there is one that comes close, the Eaton Vance Massachusetts Municipal Income (NYSEMKT:MMV), which pays 6.8%. They have paid monthly dividends since 1999.

However, for Pennsylvania residents, there is one that pays 7%, the Van Kampen Pennsylvania Value Municipal Income Trust (NYSE:VPV). This CEF has been paying monthly dividends since 1995.

You can download a free Excel database spreadsheet list of over 200 tax free stocks at WSNN.com. The list can be changed and sorted. Keep in mind that both yields and share prices fluctuate, and there is the possibility of bonds in the portfolios defaulting, as junk munis do exist, such as some 'dirt bonds' used to fund infrastructures of new housing developments (some of which never get built).

Disclosure: Author does not own any of the above.

Source: Stocks With Tax Free Yields Above 7%