Advantages Of Investing In Tax Free Municipal Bonds
First, these binding agreements are free from both federal and state taxes. In lots of instances, investors are even able in order to avoid local income taxes when purchasing these bonds, depending upon their state in which they are purchased and their state in that the bondholder resides. The different nuances that may arise when selecting the best options for individual investment goals often allow it to be necessary for novice buyers to make use of a seasoned and reputable bond broker.
The advantageous structure of the type of investing is born in large part to the Sixteenth Amendment of the United State Constitution that has been put in invest 1913, establishing your decision of the federal government not to apply direct taxes to bonds of the type. The 1986 Tax Reform Act is an extension of the exemption from being directly taxed on any earned interest from municipal securities. In essence, these bonds are legally and constitutionally guaranteed to be exempt from taxation.
One more benefit of investing in this fashion is the sense of satisfaction that folks can get from creating a worthy contribution to the betterment of those things that bond issuers commonly use these funds for.
Like, a tax free municipal bond that's issued by the institution district will help to provide a number of improvements within the local school system. In lots of ways, bondholders are frequent contributors to most of the state and local improvements that help to keep certain regions thriving.
How the Build America Bond Program Will Impact Municipal Bond
The Build America Bonds (BABs) program, a new little bit of legislation from the Obama Administration, focuses on aiding struggling state and local municipalities throughout the U.S. This system, the main American Recovery and Reinvestment Act of 2009, creates taxable municipal bonds, a radical departure from the long-standing tax exempt status quo for munis.
While bonds issued underneath the BABs program are fully taxable, the issuer receives a direct subsidy add up to 35% of the bonds coupon, or stated interest rate. The intent is to make a few of the advantages of traditional muni bonds offered to investors outside the best tax brackets.
For quite some time there has been talk within the Treasury Department and the IRS that the tax exemption for municipal bonds can be an inefficient subsidy as it allows only the best taxpayers to benefit from the tax exempt income. At current tax rates, top bracket earners avoid paying 35% on that income. That benefit obviously will increase if/when taxes go up.
The BABs program may have significant benefits when it is embraced by lower bracket earners who need taxable income from their investments. This system is likely to make it easier for municipalities to improve needed funds by bringing in a large new group of investors which have not previously participated in the municipal bond arena.
There's some question by what effect this system might have on existing tax exempt municipal bonds. The BABs program only allows bonds to be sold for new projects, to not refinance debt incurred in the past. An issuer can't issue BABs to call old debt.
Therefore, if the BABs program gains significant momentum, the municipal Bond View currently available on the market are less likely to be redeemed early. As a result most of the bonds already issued are, in-effect, non-callable. More importantly, if new issues of tax exempt bonds are virtually non-existent, the demand for existing issues by the best tax payers could increase significantly.
Some critics of the program argue that while BABs might involve some benefits for those outside the best tax brackets, the wealthiest individuals will still reap probably the most rewards. While this might be the case, I applaud the program's goal of trying to create the median income individual into the muni bond market.
This can perfectly be a nice addition for those living on their income from investments (like CD's, etc.) and an enormous win for municipalities in those elements of the country which can be struggling right now.
Nevertheless, the greatest winners might just be the ones that already own the old-style, tax exempt version of municipal bonds. We're telling our clients to keep their good quality Arizona tax free bonds.
