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If you haven't read the recent April 26, 2010 issue of Forbes Magazine yet, you should check it out. The Editor, William Baldwin, wrote about the four upcoming tax increases, and describes a multi-step technique to reduce taxes, which includes investing in a municipal bond money market fund.

Then on page 38, Ashlea Ebeling wrote an informative and extensive article called "How to Duck ObamaTax." This is a very concise and easy to understand article which should be read by anyone who pays taxes, especially someone who is in a high bracket. In the section on the Surtax on Investment Income, she makes the recommendation "buy tax-exempt municipal bonds for taxable account."

Several other advisors are making similar recommendations. However, don't just jump into any munis. States, cities, and other local governmental agencies are still suffering from the recession, higher expenses, and lower revenues. If you have a large enough portfolio, you can buy individual munis. If not, you can invest in tax free mutual funds or tax free closed end funds, also known as CEFs. The advantages of the funds over individual bonds are that greater diversification can be achieved, more liquidity is available in the event you want to sell, and the tax free income can be easily reinvested. The disadvantage is the lack of a yield to maturity, so if interest rates go up, the funds will drop in value, whereas individual bonds will eventually be paid off at par upon maturity.

One advantage that the CEFs can have over the mutual funds is that CEFs can often be bought at a discount to Net Asset Value, meaning that, in simple terms, you are buying the portfolio of bonds below what they are currently trading at. There are numerous muni funds to choose from. A list of over 200 tax free CEF stocks is available at WSNN.com. The database contains extensive information including the company, the symbol, the yield, the net asset value, recent price, premium or discount, the leverage, the management fee, when the CEF was founded, the fund's focus (state or national), percent subject to Alternative Minimum Tax, and other information.

Disclosure: None

Source: Forbes Recommends Municipal Bonds