Fidelity Analysts: Tax Uncertainty Doesn’t Blunt Appeal of Muni Bonds

Thursday, 12 Jul 2012 07:23 AM

By Dan Weil

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Municipal bonds have been on a tear for the last 18 months, and the current uncertainty surrounding income taxes doesn’t make them less attractive, say Fidelity Investments analysts Caridad O’Keeffe and Eric Golden.

The bonds, whose interest payments are exempt from federal income tax, still “make sense for many investors in high tax brackets,” O’Keeffe and Golden write on Fidelity.com.

The tax changes that could affect munis include proposals to curb or discard the tax exemption. But a strong change along those lines is unlikely, they say.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown

Another possible tax shift is an expiration of the Bush era tax cuts for ordinary income, capital gains, and dividends. That would actually make munis more appealing, thanks to their tax exempt status.

President Barack Obama’s 2013 budget included a proposal for a 28 percent ceiling on the tax exemption for muni bond income.

But it’s not clear this is something the administration or anyone in Congress is prepared to push hard.

Not only do municipal bond investors oppose it, but so do municipal bond issuers.

“Mayors, governors, and others involved in municipal bond issuance have a vested interest in retaining the municipal tax exemption, and they would likely apply considerable pressure on Congress,” O’Keeffe and Golden say.

To be sure, given the strong gains muni bonds already have racked up in the last 1 ½ years, you may want to wait for a correction before jumping in with both feet.

Editor's Note: The ‘Unthinkable’ Could Happen — Wall Street Journal. Prepare for Meltdown



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