Investors are all too familiar with the old saying -- "Nothing in life is certain but death and taxes." And while recent changes in U.S. tax laws have certainly been favorable to investors, taxes can still take a big bite out of your long-term returns.

Taxes are particularly important for income-oriented investors. The chart to the right depicts the growth of a $50,000 investment that yields dividend income of 7% annually. Assuming that the current 15% tax rate on dividends persists over the entire 25-year period covered by the chart, taxes would take out more than $50,000 worth of returns.

The situation is even worse if you're investing in bonds. When it comes to bonds, interest income isn't taxed at that special 15% rate -- this income is instead taxed at the full rate. For investors in the top income tax brackets, that means giving up about one-third of total returns -- a nasty bite out of any portfolio.

While you'll never be able to completely foil the taxman, investors can certainly take steps to reduce their annual tax burden by adding some tax-free dividend stocks or tax-free bond investments to their portfolios. Several different classes of tax-advantaged investments are worth exploring further, and with the end of the tax year fast approaching, it might be a great time to consider adding a few to your portfolio.

Municipal Bonds
Municipal bonds (munis) are issued by state or local governments and are used to fund such local projects as highways and schools. In an attempt to make these bonds more attractive to investors and make it easier for local governments to raise funds, the government has made most munis exempt from federal taxes.

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This tax-exempt feature can have an enormous impact on annual returns for investors. In fact, muni bond investors often calculate what's known as a taxable equivalent yield to compare the return on tax-free munis to other bonds. This yield is simply a measure of how much return an investor would need out of a fully taxed bond to equal the return from a tax-exempt bond.

Consider, for example, an investor in the 35% income tax bracket who wishes to buy a tax-free municipal bond paying 8%. In order to achieve the same level of return from a fully taxed bond, that investor would have to find a bond that yields over 12.5% (the taxable equivalent yield).

Investors can buy into municipal bonds in a number of different ways. One is to simply buy a fund that specializes in this area. The other is to purchase companies that buy munis directly and pass through tax-exempt dividends to shareholders...

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Important: To view the remainder of this article, in which StreetAuthority.com founder Paul Tracy and his staff provide a listing of attractive municipal bond funds, as well as an in-depth profile of two high-quality common stocks that offer 7.5% tax-free yields, you'll need to subscribe to our premium Market Advisor newsletter. To learn more, please visit the following link:
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Good investing!

-- Paul Tracy
Editor
StreetAuthority Market Advisor

Paul Tracy founded StreetAuthority and became Editor in Chief in 2001. Prior to that he spent several years as Managing Editor at a multi-million dollar financial publishing firm with over 150,000 subscribers. In addition to his role as managing editor and lead financial writer, he was also responsible for equity research and managing a team of seasoned professional financial writers, researchers and market commentators.

Paul's previous experience includes a position at Robert W. Baird & Co.'s full-service brokerage operations as well as economic research work on a Money and Banking project funded by the National Bureau of Economic Research. He has also spent time doing outside consulting and research for the University of Virginia, has appeared as a guest expert on several prominent financial radio shows, and has been a featured speaker at various investment conferences across the U.S.

Paul graduated with a B.S. in Finance and Management from the McIntire School of Commerce at the University of Virginia.

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