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With the modifications to the tax code final 12 months, many traders are at the moment assessing precisely what their general tax invoice will appear to be for 2018. Many of the probably helpful modifications within the code accrued to company fairly than particular person tax payers, holding municipal bonds high of thoughts with traders looking for tax-advantaged revenue. Whereas each company and particular person charges had been decreased, particular person tax payers now face limits on traditionally deductible gadgets corresponding to mortgage curiosity and state and native taxes (the SALT cap), which to date has elevated particular person investor demand for municipal bonds in 2019.
We’ve put collectively an inventory of the reason why your purchasers may need to hold calm and keep on with their tax-exempt mounted revenue allocations.
There's not a powerful correlation traditionally between municipal bond costs and comparatively small modifications in revenue tax charges. Particular person tax charges modified solely marginally vs. the pre-2018 tax code, and limits to beforehand deductible gadgets just like the SALT cap have solely elevated demand for municipal bonds. Actually, to date this 12 months (as of three/6/19 per Lipper Analytical Providers) municipal fund flows have totaled over $14 billion, the best inflows on file for the interval because the starting of the info set in 1992.
Many municipal traders will not be within the highest marginal tax bracket. The everyday tax fee of holders of municipal bonds is within the 24%-32% vary — a lot decrease than the best particular person tax bracket of 37%. Whereas the latest modifications within the tax code did decrease the highest marginal fee by 2.6%, traders in brackets as little as 24% might nonetheless be topic to the extra three.eight% tax on web funding revenue. It's nonetheless doable that many traders within the center tiers of the brand new marginal tax charges will see a profit from holding municipal fairly than taxable bonds.
Reducing the company tax fee to 21% has had an affect on demand for long-dated munis, particularly past 20 years, as the standard holders of those securities in addition to mutual funds have been banks and insurance coverage corporations. Banks have been web sellers of munis because the begin of 2018, as their new efficient tax charges make municipal bonds much less enticing relative to different taxable mounted revenue devices on an after-tax yield foundation. Nevertheless, companies like banks and insurance coverage corporations, are estimated to carry solely 20%-25% of tax-exempt bonds, and the revenue potential stays compelling on the longer finish of the yield curve.
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The opinions expressed right here characterize our judgment at this time and are topic to change. This will not be meant to function an entire evaluation of each materials reality relating to any firm, trade or safety. Data has been obtained from sources we take into account to be dependable, however we can't assure the accuracy.
This presentation is for normal info functions solely and doesn't represent tax recommendation. Particular person traders ought to seek the advice of with their tax skilled about their private state of affairs.
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