Unfortunately, we don’t have a clear picture about the shape tax reform will take, if any, this year. But the longer talks drag on, the less likely that any significant changes will take effect in 2017. Thus, it appears the “status quo” may apply for this year for high-income investors.
Strategy: Include municipal bonds (commonly called “munis”). Despite the inevitable ups and downs, munis remain an attractive investment to many investors, especially those in the top tax brackets.
Why are munis special? There are at least four good tax reasons under current law.
1. The interest income earned by munis is exempt from federal income tax. For example, if you’re in the top 39.6% tax bracket and you receive a 4% return on a muni, it is the equivalent of a 6.62% return on a taxable investment on the federal level (see chart below).
2. The interest income earned by munis may also be exempt from state income tax if an authority withi...(register to read more)