Taxing Muni-Bond Interest

[FIREd]

Just thought I would throw in the proposal...

"The plan would curb the value of the tax break to the benefit it affords to earners in the 28 percent bracket. The exemption effectively provides a 35 percent tax break for top earners because that’s what they pay on other income. For couples earning less than $250,000, or individuals below $200,000 for single taxpayers, there would be no change, said Meg Reilly, a spokeswoman for the White House Office of Management and Budget."



So, from what I am reading, you still would get a tax break, but only up to 28% rate... so, if you are in the 35% tax rate you will pay 7% tax on the interest.....

That's my understanding also.

 

[jerome len]

This is a tough issue to discuss. Over the years muni bonds haven't returned as much as the stock market....they have yielded an after tax gain higher than bonds, overall, for high income individuals. But they do save cities and states money and all people, middle and high income have enjoyed lower taxes and more community services because of them. Actually, eliminating muni bonds increases local expenses with the higher taxes going to the federal government. I'm not sure we want to "screw" our cities for Washington.

Another concern is how it is done. There are many ways to do it, removing tax exempt status from current muni bonds, lowering the saving from current federal taxes to 28% or eliminating exempt status from future local bonds.

A great deal of retired middle income folks own muni bonds. I have some but I'm not as rich as Suze Orman. I just like the idea of NOT having to worry about taxes on a part of my net worth and I do gain more income from muni bonds than I would on bank CD's or government bonds. They don't make me rich, however, and I would hate to see charities, muni bond holders and others lose in the tax changes. Muni holders need their income, charities need contributions and we shouldn't hurt so many that didn't cause our problems. I don't mind paying a little more in taxes.....none of us should.....and, don't forget we're not really talking about cutting govermnet spending, we're only talking about cutting the rate of increase of government spending.

I don't want to sould political............I'm not! I'm in the middle and think that both the far left and the far right should get their heads out of their butts and do what's right for all Americans.

Everyone.........have a great day. I have my health, my family and enough money to pay all my expenses..........I'm really lucky and wish the same for all.

 

[samclem]

. . . all people, middle and high income have enjoyed lower taxes and more community services because of them. Actually, eliminating muni bonds increases local expenses with the higher taxes going to the federal government.

Reducing the tax breaks for muni bonds would make these public entities compete for investment dollars on a more level playing field with private bond issuers (companies that create wealth, provide employment, etc). It's not clear that a new football stadium is a more productive use of funds than a new factory.

Tax breaks for municipal bonds is a subsidy for communities that borrow money. Communities that do a better job of managing their fiscal business (i.e. they pay for operations using taxes rather than issuing a new bond to pay salaries, pensions, etc) get less of an advantage than those which borrow more.

 

[gerntz]

No, in fact I favor it because it would make income taxes more progressive since the wealthy are the principal beneficiaries of this tax benefit. Making muni interest tax-free was probably not a great idea to begin with and it would make the code simpler once it is fully implemented.

I'd argue the states & local governmental agencies are the principal beneficiaries. Don't know why it isn't a great idea. Simplicity of the code eliminates pols ability to dole out tax perks. Net, ain't gonna happen.

How's the post count going?

 

[gerntz]

While it would constrain municipalities in the future as you suggest, that may not be bad. They should only be borrowing for capital projects to begin with so it shouldn't affect significantly affect municipal services currently provided unless they are foolishly borrowing to fund current fund operations.

Why does this concern for foolish borrowing to fund current operations apply to the states but not the Fed Gov? They at least theoretically need to balance their budgets. Thanks.

 

[audreyh1]

As far as those guys paying zero taxes, isn't that what the AMT is for? I thought it captured muni income after some point?

-ERD50

No it does not - the buyer just has to be careful which muni bonds. There are "AMT-free" muni bond funds that are careful not to buy muni bonds that incur AMT taxable income. FTABX would be an example.

 

[gerntz]

I don't want to sould political............I'm not! I'm in the middle and think that both the far left and the far right should get their heads out of their butts and do what's right for all Americans.

Hear that all the time, but of course the issue is what's right. Many different views & hence the problems. I'll bet no matter what Washington does, five random people here won't agree it was right. And if you choose to lay out here what is right by you, it will be immeidately criticized.

 

[pb4uski]

I'd argue the states & local governmental agencies are the principal beneficiaries. Don't know why it isn't a great idea. Simplicity of the code eliminates pols ability to dole out tax perks. Net, ain't gonna happen.

How's the post count going?

Good point in that the tax advantage isn't huge given differences in taxable/tax-free interest rates absorb a lot of the benefit.

I'm pleasantly surprised the thread is still open. Perhaps there is hope after all.

 

[pb4uski]

Why does this concern for foolish borrowing to fund current operations apply to the states but not the Fed Gov? They at least theoretically need to balance their budgets. Thanks.

Where did I infer that I wouldn't apply the same concern to the federal givernment?

 

[PatrickA5]

I wouldn't be opposed to Muni's being taxable going forward (assuming current bonds remain tax exempt). I also don't have a major problem with dividends and capital gains being taxed as ordinary income or cutting way back (or eliminating) itemized deductions. I think everything needs to be on the table should our elected officials ever get the notion of actually doing something about tax reform/deficit.

I should note that everything I just said I didn't have a problem with will cost me more in taxes and spending cuts would have to be a BIG part of the solution too.

 

[gerntz]

Where did I infer that I wouldn't apply the same concern to the federal givernment?

Just lack of mentioning a much bigger elephant on the table.

 

[gerntz]

I wouldn't be opposed to Muni's being taxable going forward (assuming current bonds remain tax exempt). I also don't have a major problem with dividends and capital gains being taxed as ordinary income or cutting way back (or eliminating) itemized deductions. I think everything needs to be on the table should our elected officials ever get the notion of actually doing something about tax reform/deficit.

I should note that everything I just said I didn't have a problem with will cost me more in taxes and spending cuts would have to be a BIG part of the solution too.

I think corporate profits should be taxed once either to the company or to the dividends' recievers. As is, taxing both hides the true rate to me. People ignore that companies pay up to 35% tax on profits before they ever get their dividends. Net to me, total combined rates shouldn't exceed max personal rate.

 

[bondi688]

If the interests from the Muni bonds become taxable, market force will kick in and the cities will have to pay a higher interest in order to get people to buy their bonds. The taxpayers who live in those cities will end up with higher tax bills.

 

[samclem]

If the interests from the Muni bonds become taxable, market force will kick in and the cities will have to pay a higher interest in order to get people to buy their bonds. The taxpayers who live in those cities will end up with higher tax bills.

Yes, they will. And if the cities/counties/water and sewer districts, etc have shaky finances then investors will demand a higher interest rate and the local taxpayers will end up with still higher tax bills.

One of the reasons we have municipalities building stadiums and other things that should be privately funded is because cities can borrow at a lower rate (due to the federal tax break).

 

[heirloom]

From reading your posts, it sounds like you have to be ultra rich to benefit from muni investing.

I pay fed. tax on my pension, later I am sure we will be paying tax on SS, and when I start collecting RMD, I'll be paying taxes on that.

Don't you think it would be nice to have some tax free income later in life, especially if inflation goes up?

I've been putting off purchasing any tax free bonds until Mr. Obama and Mr. Boehner make their minds up about the taxes.

 

[samclem]

From reading your posts, it sounds like you have to be ultra rich to benefit from muni investing.

Well, it's fairly cheap and easy to get into muni investing (especially through mutual funds). But they really don't make sense for investors in the lower tax brackets. People in the 10% or 15% brackets are generally better off foregoing munis, getting the higher returns, and paying the taxes.

Don't you think it would be nice to have some tax free income later in life, especially if inflation goes up?

Unless they change the laws (and they could), the tax brackets are indexed for inflation. That means that if munis don't make tax-sense for an investor today, they won't make sense tomorrow, either (unless the investor's portfolio gains inflation-adjusted value)

 

[heirloom]

Thanks a lot Samclem....Very useful information and your answers were very clear.

Soo, I guess I'll wait until the cliff falls and purchase either stock or stock funds. Letting the money sit in the bank making nothing just doesn't make sense.

 

[Hiredgun]

Here's a good article explaining how limiting the tax exemption status of Muni-bonds will affect everyone, not just the wealthy. I would posit that the wealthy will do just fine, but those in the 98% will actually bear the brunt of such a change (unintended consequences):

Even Muni Bonds May Be Targeted in 'Fiscal Cliff' Talks

 

[Hiredgun]

Here is a video explaining how the loss of tax exemption from muni-bonds would affect California, explained by Arnold Schwarzenegger's economic adviser when he was governor:

Tax Muni-Bond Interest? | Fox Business Video

 

[pb4uski]

My thoughts are this thread will run off the rails into the quagmire of partisan politics and be closed - in less than [-]10[/-] 20 posts.

Surprise!!! (me too)

 

[bondi688]

You can say, however, the higher your tax bracket is, the more the tax free muni bonds yield .

 

[Disappointed]

These tax free investments benefit those who have wealth more than the little guy, who really cannot afford to invest in them.

That is true, but how much taxes will the government get out of taxing the munis? Will it help the deficit that much?

Why not go after the mortgage deduction? The little guy that rent instead of own never see the benefit of mortgage deduction?

 

[audreyh1]

These tax free investments benefit those who have wealth more than the little guy, who really cannot afford to invest in them.

That is true, but how much taxes will the government get out of taxing the munis? Will it help the deficit that much?

Why not go after the mortgage deduction? The little guy that rent instead of own never see the benefit of mortgage deduction?

I believe that is on the table too, and it would cut a big chunk of the deficit.

The home mortgage interest deduction is one of the most cherished in the U.S. tax code. It's also one of the most expensive, estimated to cost the federal government $100 billion this fiscal year.
Long-treasured mortgage interest deduction may face changes - Los Angeles Times

 

[ERD50]

Why not go after the mortgage deduction? The little guy that rent instead of own never see the benefit of mortgage deduction?

They can go after it f they want. But I don't think it's true that the renter doesn't see any benefit from mortgage deductions - the landlord deducts mortgage interest as a business expense, and that figures into the going rate for rents.

I think the mortgage deduction just sort of levels that field a bit, allowing homeowners to write off interest the same as landlords do. But it should be on the table, I'm not sure that the leveling is a good/bad thing overall.

-ERD50

 

[target2019]

Discussing how this would affect us personally:

We've had a stake in LT tax-free for our state. It is about 4% of our total portfolio. We invested in this 20-25 years ago when in a higher bracket. It seems to grow back like weeds. The NAV is way up, and I'm taking the dividends. In past years we simply re-invested.

We could find ourselves in a 28% tax bracket if income lines are drawn differently in a new tax plan. If this LT fund was no longer tax exempt for us, I would withdrawal most of the balance and invest in something with more upside as we enter retirement in about 5 years.