There had been speculation that Congress would curb or eliminate the tax-free status of muni bonds in the fiscal cliff deal, but it didn’t happen.
Still, some analysts think lawmakers will succeed in overhauling the tax code and make serious changes to the tax exemption for income from muni bonds, the Bond Buyer reported Tuesday.
“This does not mean that pressure has disappeared,” said Matt Fabian, managing director with MMA. While munis may not be included in any immediate tax reform proposal this year, spending cut discussions might make the idea of new taxes more attractive, he added.
Mike Nicholas, chief executive officer at Bond Dealers of America, in the Bond Buyer report said the threat to tax exemption is very real right now and future fiscal reform discussions will include raising revenue, but won’t be about tax rates, which were set in the fiscal cliff agreement.
“Instead the discussion will be about limiting exempt deductions and exemptions including muni bonds interest,” Nicholas said in the story, adding that tax reform can take a long time and the prospects of it happening with a highly polarized Congress this year is unlikely.
Higher tax rates that have been approved by Congress have the wealthy seeking muni-bond exchange traded funds and other tax-exempt strategies. Muni bonds have offered investors income exempt from both federal and state taxes.
“The bad news is rates are going up,” said Gary Schatsky, president of New York-based financial advisory ObjectiveAdvice.com and a past chairman of the National Association of Personal Financial Advisors. “The good news is it could have been much worse for people in higher tax brackets, and there are things you can do about it.” [Muni ETFs Rebound: Income to Stay Tax-Free in Budget Compromise]
Municipal bonds will continue to attract assets in 2013 as investors seek tax shelters, according to asset managers. The budget deal included raising dividend tax increases from 15% to 20% for individuals earning $200,000 more and for couples earning $450,000 or more, report Christopher Condon and Charels Stein for Bloomberg. Plus, a 3.8% health-care surcharge on net investment income will apply to the aforementioned. [Muni-Bond ETFs Skid on Risk of Tax Increase]
“With higher taxes coming for many Americans, I believe the tax-free coupon makes munis all the more desirable,” said James Colby, portfolio manager at Market Vectors ETFs. [No Cliff for Muni Bond ETFs]
In 2012, muni bonds were a $3.7 trillion market, with $51 billion in new deposits. This is the most since 2009, according to data from the Investment Company Institute. [2012 was the Year of the Bond ETF]
Some muni-bond ETFs include:
- Market Vectors High-Yield Muni ETF(NYSEArca: HYD)
- iShares S&P National AMT-Free Municipal Bond ETF (NYSEArca: MUB)
- Market Vectors CEF Municipal Income ETF (NYSEArca: XMPT)
- Market Vectors Long Municipal Index ETF (NYSEArca: MLN)
Tisha Guerrero contributed o this article.