Munis and high-income senior tax planning

Rich White for BenefitsPro writes: The municipal bond industry is concerned about a proposal to cap the value of tax-exempt municipal bond interest to 28 percent for high-income taxpayers.

The proposal has appeared in the past two (FY 2013 and 2014) Obama budgets, although in somewhat different form. The 2013 budget proposed the cap only for joint filers reporting taxable income above $250,000 or single-filers above $200,000. The 2014 proposal would affect any taxpayer in a bracket above 28 percent (currently 33 percent, 35percent and 39.6 percent).  Actually, the proposal helps to demonstrate who is facing the highest marginal tax impacts in America – high-income seniors.

Recently, the group Municipal Bonds for America estimated that about 59 percent of muni interest goes to investors age 65 and over. Their statement against the proposal, delivered to the House Ways and Means Working Group, is available to read.
For a 35-percent bracket senior who invests in munis, enacting the proposal would add about 7percent to the marginal rate – on top of current income taxes, the new 3.8 percent UIMCT, the impact of deduction and exemption phase-outs, and the Medicare Part B premium surcharge.

In total, it potentially creates a 55-60 percent marginal rate.  Fortunately, many high-income seniors have the flexibility to plan ahead and adjust reported taxable incomes. 
Now is the time to emphasize tax planning and tax-managed investment solutions to your high-income senior clients. Read the Bond Buyer’s analysis of the proposed 28 percent tax-exempt cap.