Municipal Bond Forum
Clarifying cap idea
Q
In your article, “Exemption Defenders“, you mention the idea of capping muni interest income at 28%. What exactly does that mean?
A
James A. Klotz responds:
The proposal to cap the municipal bond tax exemption at 28% can be a little confusing.
Under that measure, muni bond holders in the 28% tax bracket would still receive their income completely tax free. The impact would be on those in higher tax brackets, such as 33%, 35% and 39.6%. Capping their tax benefit at 28% would effectively impose, respectively, a 5%, 7% and 11.6% tax on their municipal income.
As we have said, it’s an idea that would hurt the economy and job creation and a host of local, state and national officials are arrayed against it. In the unlikely event this ill-conceived proposal is adopted, municipal bonds would still provide high net worth investors better after-tax yields than any taxable fixed-income securities of comparable quality.
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