Municipal bonds are an attractive tax shelter

While those who may have their taxes raised will not be happy, the higher rates will also make the tax-exempt municipal bond market a more attractive tax shelter. With higher tax rates, the yield on a tax-exempt municipal bond becomes more valuable because the equivalent yield in the taxable market moves higher.
For example, assuming the top federal rate moves from 35 % to 39.6% as is currently scheduled in the law, a municipal bond with a 5% yield will equal 7.69% for a bond that is subject to Federal income tax in the 35% tax bracket, currently the top tax rate. But at a rate of 39.6 percent, the 5% yield is equal to an 8.28% return on a taxable bond.
To make the tax-free argument more compelling, the current proposed legislation expands the Medicaid Proposed Federal Income Surtaxes. Top tax rates could increase to as high as 57.5% in some states. Under that scenario, a 5% tax-free yield will equate to an 11.76% taxable yield.

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Posted in Taxes

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