Muni Bonds & SALT (State and Local Taxes)

How has the new tax law enhanced or decreased the need for high income clients to have exposure to Muni Bonds?

The $3.8 trillion Municipal Bond market is a huge source of topic now with the current $10,000 cap on state and local tax deductions. Investors are trying to find any way they can to pay as little as possible to the federal government and muni bonds might be the answer.

In 2019, muni bonds gained more than $8.8 billion in net flows in the first quarter, beating U.S. equity funds by over $2 billion!

So how is SALT benefiting muni Bonds?

Residents of high tax states might suffer some unexpected “heartburn” due to increased federal tax liability. Instead of freaking out, municipal bonds might be the answer. Wealthy households have a continued interest to tax-free income, especially after looking at their tax bills. These wealthy households are attracted to muni bonds because their interest payments are exempt from income taxes. These tax benefits are higher for those sitting in higher tax brackets. According to Forbes, top-bracket taxpayers can save up to 39.6 cents on the dollar through muni bonds, and those in the 25 percent bracket can save up to 25 cents on the dollar.

On March 9, we had a 30-year muni yield of 3.1% vs 2.8% on a 30-year treasury. After you factor in the Muni’s tax exemption it becomes a 5.5% taxable equivalent yield. As you can see, it is definitely smart for high income/high tax bracket individual to look at muni bonds. People in the lower brackets can still benefit as well.

 

Please contact us: At Valley Oak Wealth Management, our highly skilled staff can help you decide if Muni Bonds are something that you should consider incorporating into your portfolio. We will take a detailed look into your finances, and offer our professional opinion on a further course of action to take together.

 

 

*This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. Municipal bonds are subject to availability and change in price. They are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Interest income may be subject to the alternative minimum tax. Municipal bonds are federally tax-free but other state and local taxes may apply. If sold prior to maturity, capital gains tax could apply.