Tax-exempt bond funds and the new tax brackets

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John151
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Joined: Fri Mar 02, 2007 6:03 pm

Tax-exempt bond funds and the new tax brackets

Post by John151 » Fri Dec 22, 2017 5:39 pm

The rule of thumb under our current tax brackets has been that the 25% bracket is the break-even bracket for tax-exempt bond funds. Investors in brackets lower than that should have their bond investments in taxable funds, and investors in brackets higher than that should have their bond investments in tax-exempt funds. In the 25% bracket, it’s supposedly a wash.

With the new tax brackets taking effect in 2018, what is likely to be the break-even bracket?

mjb
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Joined: Sat Nov 30, 2013 11:43 am

Re: Tax-exempt bond funds and the new tax brackets

Post by mjb » Fri Dec 22, 2017 6:48 pm

So, theoretically, the income threshold is the major driver. For the past decade or so, the 25% bracket has been the break even, mostly because that is the first bracket where individuals are capable of accumulating larger amounts of savings outside of retirement.

As the income thresholds for brackets did not change, the former 25%, now 22%, should still be the break even point with the price of municipal bonds adjusting to a 22% rate. However, if the bond prices for munis do not adjust within a short period of time, the next higher bracket will be the break event bracket.

Moral of the story, the market will set it, but as the tax rates and brackets didn't change that much, I would not expect a significant change.

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