Beginning in 2013, there’s an extra tax incentive for investing in municipal bonds (munis).
Strategy: Include more munis in your portfolio to sidestep the new 3.8% Medicare surtax.
Here’s the whole story: Historically, investors have been encouraged to invest in munis due to three significant tax breaks.
- The interest income earned by munis is exempt from federal income tax. For example, if you’re in the 25% tax bracket and you earn a 6% return on a $1,000 investment, you normally realize a 4.5% after-tax return. In comparison, there’s no tax federal income dilution with investments in munis (see chart below).
- The interest income earned by munis may also be exempt from state income if the bonds are issued by an authority within the state where you reside. This further increases the after-tax return on certain bonds.
- The interest income earned by munis generally does not count toward your AGI. Therefore, the tax exemptions c...(register to read more)