Stocks vs. Bonds: Tax Strategies, State by State

It's a given for many academics and investors that over the long run stocks outperform bonds. But those in the top tax bracket may want to rethink that axiom, especially if they live in states with high income tax rates. That's because for tax purposes, most states generally don't treat stock gains or dividends any differently than ordinary income.

For example, in such states as California and New Jersey, taxable investors face not only the 15% federal tax on long-term capital gains but an additional 10% in state income tax on those gains. So you can see how the equation might begin to change when comparing stocks with tax-free municipal bonds.