A second type of bond investment that might make sense for you— especially if you’re in a high tax bracket—is tax-free municipal bonds. When you buy a muni, your interest is generally free of federal income tax, and if the bond was issued by your state of residence, you generally won’t have to pay state or local taxes eithet But there are a couple of potential bugaboos. First, some types of muni bonds could be subject to the alternative minimum tax (AMT), an additional tax system created to ensure that people who claim many deductions still pay their fair tax bill. In addition, tax-exempt interest can impact the taxable status of your Social Security benefits. Be sure to double-check your situation with your tax advisor.