high tax bracket - muni bonds in taxable

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sambb
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high tax bracket - muni bonds in taxable

Post by sambb » Sun Nov 04, 2018 8:30 pm

Lets speculate that one is in the highest tax bracket
Lets also speculate that the tax equivalent yield of tax exempt intermed term funds is higher than the taxable yield of taxable intermediate term bond funds

So, with tax exempt bonds in taxable, a high income individual receives the following:
1. Higher tax equivalent yield of bonds for near equivalent maturity
2. Less taxable dividends, as stock funds in taxable would give off quarterly dividends
3. Unclear what capital gains taxes will be in 10-20 years, so unclear if tax benefit of LTCG will stay
4. Thus, can make an argument to have muni bonds in taxable, and put some stick funds in tax deferred
5. Ultimatley unknwon because no one knows future tax laws

Is this correct

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BoglePaul
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Re: high tax bracket - muni bonds in taxable

Post by BoglePaul » Sun Nov 04, 2018 8:37 pm

Anything can happen in the future. If equities were to decrease in value, then the person would be unable to write off the loss in a tax deferred account. Perhaps better to keep a mix in both accounts?

sambb
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Re: high tax bracket - muni bonds in taxable

Post by sambb » Sun Nov 04, 2018 8:38 pm

yes, it is a good case to keep allocatiosn equivalent - hence hedging one's bets. For example, both accts could be 60/40 if the goal is 60/40 overall. No need to take one stance or another.

sambb
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Re: high tax bracket - muni bonds in taxable

Post by sambb » Sun Nov 04, 2018 11:16 pm

the wiki doesnt reflect these things

Elbowman
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Re: high tax bracket - muni bonds in taxable

Post by Elbowman » Sun Nov 04, 2018 11:25 pm

White Coat Investor did an article on this: https://www.whitecoatinvestor.com/asset ... n-taxable/ . It seems fine to do.

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grabiner
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Re: high tax bracket - muni bonds in taxable

Post by grabiner » Mon Nov 05, 2018 8:09 pm

In high tax brackets, I do prefer holding muni bonds in taxable accounts rather than stocks (with taxable bonds in an IRA). This is particularly important if you can use munis for your high-tax state.

Most taxpayers pay 15% tax on qualified dividends and capital gains, and 0% on munis. At current yields, the lower yield of munis relative to taxable bonds isn't worth the tax savings.

But if you are in a high tax bracket, you pay 18.8% (including Net Investment Income surtax) or 23.8% (in the top tax bracket) on qualified dividends and capital gains. And if you are in the 9.3% CA tax bracket, even if you aren't over the Net Investment Income threshold, you pay 24.3% tax on dividends and capital gains, but 0% on CA munis.
Wiki David Grabiner

sambb
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Re: high tax bracket - muni bonds in taxable

Post by sambb » Mon Nov 05, 2018 8:25 pm

grabiner wrote:
Mon Nov 05, 2018 8:09 pm
In high tax brackets, I do prefer holding muni bonds in taxable accounts rather than stocks (with taxable bonds in an IRA). This is particularly important if you can use munis for your high-tax state.

Most taxpayers pay 15% tax on qualified dividends and capital gains, and 0% on munis. At current yields, the lower yield of munis relative to taxable bonds isn't worth the tax savings.

But if you are in a high tax bracket, you pay 18.8% (including Net Investment Income surtax) or 23.8% (in the top tax bracket) on qualified dividends and capital gains. And if you are in the 9.3% CA tax bracket, even if you aren't over the Net Investment Income threshold, you pay 24.3% tax on dividends and capital gains, but 0% on CA munis.
well said. I wish this sort of analysis of top tax brackets was in the wiki. The benefit of stocks in taxable, is truly very low in high tax brackets when munis have a superior tax equivalent yield, and stocks have significant taxable dividends

inbox788
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Re: high tax bracket - muni bonds in taxable

Post by inbox788 » Tue Nov 06, 2018 2:16 pm

sambb wrote:
Mon Nov 05, 2018 8:25 pm
grabiner wrote:
Mon Nov 05, 2018 8:09 pm
In high tax brackets, I do prefer holding muni bonds in taxable accounts rather than stocks (with taxable bonds in an IRA). This is particularly important if you can use munis for your high-tax state.

Most taxpayers pay 15% tax on qualified dividends and capital gains, and 0% on munis. At current yields, the lower yield of munis relative to taxable bonds isn't worth the tax savings.

But if you are in a high tax bracket, you pay 18.8% (including Net Investment Income surtax) or 23.8% (in the top tax bracket) on qualified dividends and capital gains. And if you are in the 9.3% CA tax bracket, even if you aren't over the Net Investment Income threshold, you pay 24.3% tax on dividends and capital gains, but 0% on CA munis.
well said. I wish this sort of analysis of top tax brackets was in the wiki. The benefit of stocks in taxable, is truly very low in high tax brackets when munis have a superior tax equivalent yield, and stocks have significant taxable dividends
It's complicated. The issue of asset location has me going around in circles. Is it Muni vs treasuries vs corporate? Stock vs bond location? Taxable vs Roth or IRA?

https://www.bogleheads.org/wiki/Tax-eff ... _placement

I'm not sure there is a consensus strategy yet. Lower muni yields reflects most of the benefit. I know Puerto Rico is a special case, but some people feel muni's risks aren't compensated by the yield differences. There are many factors to consider, like "current yields" that aren't fully explained today and unknown in the future.

FWIW, IMO, it's a different risk/reward that's worth taking for the long run, but they're not substitutes. (akin to SCV tilt and REIT tilts aren't TSM)

sambb
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Re: high tax bracket - muni bonds in taxable

Post by sambb » Tue Nov 06, 2018 9:42 pm

i think the wiki is terrible at considering the options for high tax brackets

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