High Earners Who Pay 37% to the IRS Actually Have an Easy Workaround Now | PZA

"High earners face a painful reality with taxable bonds, the IRS claims up to 37% of every interest payment. A bond yielding 4% in nominal terms delivers far less after federal taxes extract their share. Invesco National AMT-Free Municipal Bond ETF ( NYSE:PZA) sidesteps this erosion by delivering federally tax-exempt income, making it particularly valuable for investors in the top tax bracket."

"PZA holds over 5,600 municipal bonds issued by states, cities, and local governments. These bonds fund infrastructure projects like roads, schools, and hospitals. In exchange for lending money to these entities, investors receive interest payments exempt from federal income tax. The ETF distributes this income monthly, currently yielding around 3.9%. The tax advantage grows more powerful as income rises. For someone in the top federal bracket, PZA's tax-free yield becomes equivalent to earning significantly more from taxable bonds-roughly 6.2% before taxes."

"Not all municipal bonds are equal for tax purposes. Some trigger the Alternative Minimum Tax, a parallel tax system that can catch high earners off guard. PZA specifically excludes those bonds, making it a safe harbor for investors subject to AMT. With recent policy changes potentially expanding AMT exposure starting in 2026, this feature matters more than many realize. PZA's recent performance reflects the challenging environment for bonds throughout 2025."

PZA provides federally tax-exempt income by holding over 5,600 municipal bonds issued by states, cities, and local governments that fund infrastructure projects such as roads, schools, and hospitals. The ETF distributes monthly income and currently yields around 3.9%. For investors in higher federal tax brackets, that tax-free yield equates to roughly 5.74% (32%), 6.0% (35%), and 6.19% (37%) on taxable bonds. PZA excludes bonds that trigger the Alternative Minimum Tax, reducing AMT exposure risk. Recent policy changes could expand AMT exposure starting in 2026, increasing the relevance of AMT-free municipal exposure. Taxable alternatives such as iShares Core U.S. Aggregate Bond ETF ( NYSE:AGG) surrender much of their yield to federal taxes, enhancing PZA's relative appeal. The fund faced a challenging 2025 bond environment.

Read at 24/7 Wall St.