Covell Financial

States may continue to exempt their residents from paying taxes on that state's municipal bonds, according to a recent ruling by the U.S. Supreme Court.

The decision overturns a lower court decision involving the state of Kentucky. If it had been allowed to stand, the lower court decision would have had a substantial impact on muni bond investors, particularly those who own single-state mutual funds designed to provide a double tax advantage to residents of a particular state. The Supreme Court ruled that such in-state tax exemptions play an important role in helping states fund public projects.

Clarifying the tax status of state municipal bonds for local residents removes an issue that, coupled with the general credit crunch, had been weighing on the market for municipal bonds.