Archive for the ‘Taxes’ Category

Grandfathered Out-of-state Muni Bonds

Friday, July 8th, 2011

Shown at bottom is the relevant section of the State’s Fiscal Impact Statement (front page shown immediately below) regarding the grandfathering of out-of-state municipal bonds held as of December 31, 2011. I should probably remind you to check with your tax professional. There’s probably something somewhere that says we have to tell you we are not authorized to provide tax advice. Click on the image immediately below to go right to the full document. Once there, use your browser to search for “municipal.” You’ll eventually get to page 10, where the grandfathering is mentioned.


Attention: Indiana muni bond buyers

Thursday, May 5th, 2011

This week the Indiana legislature passed a measure that will make out-of-state municipal bonds taxable at the state and local tax level to Indiana residents.  According to The Bond Buyer, the law will take effect in 2012, and it is expected to generate “about $66 million annually,” and will go toward offsetting the $78 million loss of revenues from cutting the state’s corporate tax rate.

Up until now, Indiana residents have enjoyed triple-tax exemption on interest received on all non-taxable municipal bonds, which is unlike the arrangement in most states.  In most states it is common to tax out of state municipal bond interest, and in many states it isn’t uncommon to see only certain in-state municipalities tax-exempt at the state and local tax level.  All tax-exempt municipal bonds remain exempt from federal tax,  regardless of where from, and some particular issuers–Puerto Rico comes to mind–enjoy triple-tax exemption in all states.

At the margin, this change will have the following effects.   First, the demand for Indiana bonds will increase as Indiana residents who want to generate income exempt from Indiana state tax will be forced to buy Indiana municipal bonds.  Admittedly, the effect might be quite small as our state income tax rate of 3.4% (plus local taxes) doesn’t mean as much as, say, New York’s 10% tax.  Second, and related to the first, yields should drop on Indiana bonds (i.e. prices will increase).  Historically, Indiana municipal bonds have always traded cheap; this is, their yields were amongst the highest available. That’s unlikely to change significantly, only slightly.

In spite of the lower after-tax yields of out-of-state bonds to Indiana residents, the tax effects are small enough that the crucial diversification benefits of non-Indiana muni bonds should still be considered. In client accounts we will look at give-up yields, or the yield based on what someone is willing to pay us for the non-Indiana bonds, versus the yield on Indiana bonds. If we can get a after-tax yield on the Indiana bond that is better than the after-tax give-up yield on the bond we’re looking to sell, then we swap; if not, we pay the tax and hold the bond.

May 6 update

** There appears to be a provision to grandfather all bonds held as of December 31, 2011. For now that is unconfirmed.  **


Taxes – II: Soaking the Rich

Wednesday, August 11th, 2010

So here’s Congress’ idea of soaking the rich, and why it won’t make any difference.

Presently the discussion in Congress on the Bush tax cuts (BTC) seems to be favoring extending them for all but the uber-rich.  There is a study out from The Joint Committee on Taxation that shows the results of that.  A story on Bloomberg highlighted some features of the wealth re-distribution that would result when the BTC expire.

The report breaks down the uber-rich into three categories:

1.  Those with incomes between $200,000 – 500,000

These folks would pay about $2 billion more in 2011 taxes.

2.  Those with incomes betweeen $500,000 and $1 million

These folks would payabout $6 billion more in 2011 taxes

3. Those with incomes above $1 million

This group really gets soaked, paying an additional $30 billion more.  According to Bloomberg, that’s about $95,238 each.

Add it all up, and it’s a tax increase of $38 billion, which is . . .

  • about one week’s worth of the July budget deficit.
  • about 37 days worth of the interest on the Federal debt

8/12 update

This is from a Strategas note of this morning:  analysis being done on the higher-income components of the Bush tax cuts, which says lifting the top two income tax rates will lead to just a -0.2 pct of GDP drag since the provisions will only raise $40bn in tax revenue.


Taxes – I

Thursday, July 29th, 2010

When we meet with clients we often find ourselves at odds on the big picture items like inflation.  Most times it’s a matter of timing, not the big picture item, itself.  For example, we think inflation will be a big problem; just not for a while.  One area where we firmly agree is on the subject of taxes.  We both agree that they’re heading higher, and soon.

Here, then, in looking at the subject is the first of what should be several posts on the subject.  It looks at the current income tax structure and what it would revert to if the so-called Bush tax cuts* are allowed to expire.  While this is not particularly heavy lifting, I am using information from The Tax Foundation (  I have no idea which way this group leans, but it looks pretty non-partisan.

Presently, there are six income tax brackets.  They’re marginal income tax brackets in that they represent the tax paid on the next dollar of income.  Here are the brackets:

  1. 10%
  2. 15%
  3. 25%
  4. 28%
  5. 33%
  6. 35%

If the Bush tax cuts are allowed to expire the new tax brackets will look like this:

  1. 15% (10% bracket is eliminated)
  2. 28% (formerly 25%)
  3. 31% (formerly 28%)
  4. 36% (formerly 33%)
  5. 39.6% (formerly 35%) – this is apparently the only verbatim reversion the White House is clear on.

The long-term capital gains tax rate would go from 15% to 20%.

The tax rate on qualified dividends would rise from 15% to ordinary income tax rates.

*  According to Miller Tabak, the Bush tax cuts are generally considered to be those from two separate acts, the Economic Growth and Tax Relief Reconcilation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003.  There are 69 separate provisions that are set to expire.  You can see the entire list here.