Municipal Bond Forum
Idea to cap tax-free income will find stiff resistance
Q
What do think about the idea being discussed in Washington of capping the benefit of municipal at 28%? Does that mean that if you have $100,000 in tax-free bonds, only $28,000 would be tax free and the balance would be taxable?
A
James A. Klotz responds:
The 28% cap on tax-free income to which you refer was initially introduced by President Obama in his jobs bill in the fall of 2011.
If enacted, it would, in essence, limit the tax benefit on municipal bonds to 28% for individuals who earn more than $200,000 a year and couples earning more than $250,000 per year. Today the exemption is worth 35%. The net effect would be a 7% tax on municipal bond interest.
We think this will be a difficult provision to pass through the Republican majority in the House of Representatives. There will also be resistance from governors and the National League of Cities because it would impose higher borrowing costs for future financings.
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