Municipal Bond Forum
Unearned income Medicare tax
Q
Can you tell me about the new 3.8% tax and its impact on tax-free muni bonds?
A
James A. Klotz responds:
The new unearned income Medicare tax is in Section 1402 of the Health Care and Reconciliation Act of 2010.
The provision to which you refer imposes a 3.8% tax on income from interest, dividends, annuities, royalties and rents that are not derived in the ordinary course of trade or business. This tax will apply to taxpayers with incomes over $200,000 filing individually or $250,000 for joint filers.
It is our understanding that the required gross income calculation does not include items such as veterans’ benefits and interest on tax-exempt bonds.
Because of this exclusion, the only impact we foresee on the municipal bond market is an enhancement of the value of existing bonds. Tax exemption becomes more valuable when tax rates rise.
Keep in mind that we are municipal bond specialists not tax experts. We advise you to contact your own tax professional to determine your personal responsibilities under this law.
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The responses provided in this forum are meant to address specific questions posed by investors about their municipal bonds and to provide market insight for our general audience. Please note, your investments, objectives, results and experience may differ significantly. Our answers and any potential strategies discussed should not be construed as a solicitation to buy nor sell any security or investment product. All investing entails risk.