Many successful investorswill be in for a shock during upcoming
tax seasons. There is nothing worse than having a banner year in
thefinancial markets , then having to give a large portion of it to
Uncle Sam in the form oftaxes .
Frankly, I'm concerned that the pain is going to be worse for
winning investors who have failed to prepare themselves for the new
era of higher tax rates.
Here's what the new tax lawsmean to you
If you are in the toptax bracket , meaning you earn more than
$400,000 (or $450,000 for married couples), then yourmarginal tax
rate will jump to 39.6% and the rate on long-term capital gains
anddividend interest will increase five percentage points to 20%
for the 2013tax year . A new 3.8% tax related to theAffordable Care
Act (more commonly known as "Obamacare ") and a 0.9%Medicare surtax
are also going to hittaxpayers who make more than $200,000 (or
$250,000 for married couples) in modified, adjusted gross
That's why it's important to design yourinvestment portfolio in
the most tax-efficient way, even if you are under this
threshold.Investing within a retirement account and diversifying
into tax-advantaged instruments is the primary way to lessen your
And one of the most widely used tax-exempt instruments in
themarket are municipal bond funds.
Although tax-exempt municipal bondsyield less than taxablebond
funds , they often make more investing sense because of their tax
Let me explain...
Municipal bonds, also known as munis, are debt instruments
issued by public entities like cities, states and counties, which
use the proceeds tofund various public works projects such as
roads, schools and power plants. Thesebonds can be based onrevenue
or general obligations.issuer , which can allocate or increase
taxes to assure the interest is paid andprincipal is
Why do munis make sense now?
The short answer is because the interest earned from owning
municipal bonds and municipal bond funds is generally exempt
fromfederal income taxes . In addition, depending on the issuer,
they can be exempt from state or local taxes.
With all this information in mind, here are two of my
favoritemunicipal bond investments ...
1. Invesco Value Municipal Income Trust (
This fund is built with tax-free,fixed-income instruments
consisting primarily of municipal bonds rated "A" or better. It
yields about 5.6%. If you are in the 35% tax bracket, then this
tax-free yield is equivalent to an almost 8.6% taxable
This example clearly shows the benefits of investing in tax-free
municipal bond funds. As taxes increase, so will the benefits. IIM
is also insured. This means the interest and principal are
guaranteed to be paid. And I'm not the only who feels secure. My
colleague Amy Calistri
recently added this fund
2. Black Rock Municipal Bond Investment Trust (
Launched in 2002, thismunicipal bond fund invests in fixed-income
markets in the United States. It's well diversified across the
space with investments in hospitals, water, sewer, education, tax,
housing, lease, power, tobacco, transportation and industrial
pollution control sectors. It yields roughly 5.5%, which is
equivalent to an 8.5% taxable yield for investors in the 35% tax
Risks to Consider:
It's critical tonote that the capital gains from distributions
or from the sale of a bond are still subject to taxes. The new 3.8%
Obamacare tax, for example, does not include income earned from
municipal bond interest. Therefore, if you are dependent on fixed
income, then this fact alone could influence your decision to
allocate additional funds into municipal bonds as part of your
Action to Take -->
The personal investment value of municipal bond funds is directly
related to your tax bracket. If you are in the 15% bracket, then it
makes little sense to accept the lower yields of municipal bonds.
However, from tax brackets of 25% and up, municipal bonds
increasingly make sense. Always be certain to consult a
professionaltax advisor prior to making any investment
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