Municipal Bond Rules Changing?

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LFrugal
Posts: 30
Joined: Sat Feb 09, 2013 10:13 am

Municipal Bond Rules Changing?

Post by LFrugal »

Anyone else as concerned as I am that the federal tax exemption for municipal bonds may be in jeopardy as Washington seeks yet another source of revenue?

A recent budget request would eliminate or cap the exemption on tax-exempt bonds at 28 percent, making all or a portion of the interest on municipal bonds subject to federal taxation, increasing the cost of borrowing by your local utility and your local government.

If enacted, yet one more tax increase hitting those of us about ready to retire. Yikes!
NYBoglehead
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Re: Municipal Bond Rules Changing?

Post by NYBoglehead »

I for one am not worried. The states and municipalities have no interest in seeing the tax-exempt status go away (in its entirety, capping the exemption might be different). The biggest beneficiaries of the tax-exempt status of municipal bonds are states like California, New York and New Jersey, which have a large proportion of the votes in Congress.

Secondly, even if they cap the exemption at 28% the overwhelming majority of people will not be affected, and to be the 28% in retirement means that you have $146,000 in TAXABLE income for MFJ (meaning at least $166,000 in total income using the standard deduction and personal exemption for MFJ). The tax-equivalent yields would still be attractive enough to draw investors, so I don't think that proposal would have that profound of an impact on the borrowing costs of states/cities/municipalities.
Topic Author
LFrugal
Posts: 30
Joined: Sat Feb 09, 2013 10:13 am

Re: Municipal Bond Rules Changing?

Post by LFrugal »

I'm guessing what would likely happen here is investors will simply demand a higher yield and state and local governments would suffer and would be forced to raise state and local taxes. So one may be free and clear on their federal return if under the income thresholds, yet hit right where they live with higher state and local taxes.
Alex Frakt
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Re: Municipal Bond Rules Changing?

Post by Alex Frakt »

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