- Days left

Muni Bonds: How Killing a Tax Break for the Rich Could Hit Everytown, U.S.A.

Republicans in Congress and President Obama remain locked in their seemingly interminable debate over how to avoid the fiscal cliff of tax increases and spending cuts set to befall us at the end of the year. As they've tried to break the stalemate, lawmakers have looked at a variety of proposals to raise revenue, among them, ending certain tax breaks and exemptions.

One particular tax break that has gotten more attention recently is the exemption for municipal bond interest. However, while it's easy to pitch muni bonds as a tax dodge for the rich, eliminating the tax break could cost local governments a fortune in higher borrowing costs.

The Scoop on Muni Bonds

Municipal bonds are bonds that state and local governments issue to raise money for public projects.

Ranging from general obligation bonds, the money from which states can use on whatever they choose, to more specialized bonds sold specifically to finance such things as sewers, hospitals, and school construction, muni bonds help governments bridge the gap between their immediate needs and the future revenue with which they'll be able to pay for them.

To encourage investing in munis, the U.S. tax code makes the interest they pay exempt from federal income tax. If you buy munis issued within your state, you won't have to pay state income tax on that interest either.

A Matter of Fairness

But the tax exemption on muni-bond interest is worth the most to high-income taxpayers. That's because the amount you save on exempt muni-bond interest is directly tied to your tax bracket: The higher the bracket, the bigger your tax break.

Recent proposals would put a cap on the tax benefit you can gain from muni-bond interest, preventing high-income taxpayers from getting a full exclusion. That may seem fair, but it could also make life a lot harder for the governments that rely on muni bonds.

Paying More

Because of the tax exemption, muni issuers can offer lower rates than those paid by comparable taxable bonds. In a muni bond market estimated at $3.7 trillion, those lower rates save governments billions of dollars every year.

Tamper with the tax break, though, and you risk pushing muni rates higher. That will take away a big part of those savings and force states, cities and towns to bear an even heavier burden -- and to raise taxes to pay those higher interest rates. Given the financial stresses already hitting towns, that's the last thing many governments need.

Munis may help rich taxpayers, but they also help everyone by making public projects possible. Take the muni tax break away, and you risk plunging local governments into even more difficulty.

Motley Fool contributor Dan Caplinger owns some muni-bond funds. You can follow him on Twitter @DanCaplinger.

Increase your money and finance knowledge from home

Portfolio Basics

What are stocks? Learn how to start investing.

View Course »

Investor’s Toolbox

Improve your investing savvy with the right financial toolset.

View Course »

TurboTax Articles

5 Tax Tips for Single Moms

If you're a single mom filing your taxes, make use of tax credits and deductions that can help reduce your taxable income and reduce the amount of tax you pay. A number of strategies, credits and deductions can be used to reduce taxable income, and in some cases, allow tax refunds even if you didn't pay in any taxes. When you use TurboTax, we'll ask simple questions and handle these calculations for you.

Essential Tax Forms for the Affordable Care Act

The Affordable Care Act (ACA), also referred to as Obamacare, affects how millions of Americans will prepare their taxes in the new year. The law now includes penalties for all who haven?t obtained health insurance -- and those penalties are expected to be paid at tax time. The ACA also provides tax credits to help people pay for insurance, and you can claim those credits when you file your taxes. The Internal Revenue Service (IRS) has introduced a number of tax forms to accommodate the ACA.

What is Form 1095-A: Health Insurance Marketplace Statement

If you bought health insurance through one of the Health Care Exchanges, also known as Marketplaces, you will receive a Form 1095-A which provides information about your insurance policy, your premiums (the cost you pay for insurance) and the people in your household covered by the policy.

Keeping Yourself Safe From Tax Scams Today

During tax time, there are numerous types of tax scams. These illegal schemes can result in the taxpayer being responsible for extra interest, penalties and possible criminal prosecution. Tax schemes and scams attempt to gain access to your financial information by email, telephone, fax or mail. They also may attempt to falsely collect tax you owe to the Internal Revenue Service. Using TurboTax ensures your financial information remains safe.

Health Care and Your Taxes: What's the Connection?

Your cost for Marketplace health insurance is based on the income you file on your tax return. Your reported income also determines your eligibility for the tax credits and penalties associated with Marketplace health coverage. Everyone has to have health insurance and by filing your taxes, you let the government know if you carry health insurance. The tax system acts as a way for the government to levy a penalty on those who don?t have it and to provide assistance, by means of a tax credit, to those who do.

Add a Comment

*0 / 3000 Character Maximum


Filter by:

I doubt that we will see many of the tax breaks for the wealthy go away. Face it, they are the ones who buy the campaign TV adds that the 99% swallow hook line and sinker.

December 17 2012 at 6:22 AM Report abuse +7 rate up rate down Reply

i would love to see the 99% go on a rent strike all across the united states just for 2 months only, what would happen, evict everyone or sent everyone to jail, i doubt it

December 16 2012 at 8:27 PM Report abuse +7 rate up rate down Reply

You want to stick it to the rich real good, then don't spend money you do not have on useless gifts this year, by not spending any money their stocks portfolios will start to crumble hitting them right where it hurts, in their pockets, respect your hard earned cash folks because if you dont do that , you don't respect yourself.

December 16 2012 at 8:20 PM Report abuse +6 rate up rate down Reply


December 16 2012 at 5:49 PM Report abuse -4 rate up rate down Reply
3 replies to democrackso's comment

Tea party means actually Taxed. Enough. Allready. I suppose you lefty dims love taxes so you can't buy stuff.

December 16 2012 at 5:21 PM Report abuse +2 rate up rate down Reply
1 reply to Jawmore's comment

When did O'Bama switch parties ?

December 16 2012 at 5:23 PM Report abuse -10 rate up rate down Reply
1 reply to evan_barthold's comment

Barry loves exta money, espscially when it come to taxws,

December 16 2012 at 5:25 PM Report abuse -4 rate up rate down
Hello, Karen

The rich are going to whine and cry anyway.

December 16 2012 at 5:08 PM Report abuse rate up rate down Reply
2 replies to Hello, Karen's comment

o'bama is rich

December 16 2012 at 5:10 PM Report abuse -3 rate up rate down Reply

Karen, isn't that the truth

December 16 2012 at 6:01 PM Report abuse +7 rate up rate down Reply

I luv barrys nuts on my chin

December 16 2012 at 4:56 PM Report abuse -7 rate up rate down Reply

Funny then how cities take our bonds for things such as sewer systems. Then they assess the taxpayers and say you can benefit by us taking out the bond, BUT we will charge you 2% monthly on the loan. Making a profit. Telling you that the city is using the funds for bookkeeping.
Odd thing is the county collects this, and cities stand to make a profit off of the loan to have no work.

As we can understand a one time set up fee but to make a profit from your residents is just wrong when residents have no choice, and cities should plan for future. Rather then spend it all concept they have today.

December 16 2012 at 11:28 AM Report abuse rate up rate down Reply

Ike was A republican and the country has not flourished like that since. Lets use the tax code he used and watch the rich cry and the country flourish. Trickle down economics is a proxy scheme and ilegal for any one except the government. The Bush tax cuts and his put every american in a home regardless if they can't pay for it led to the crash. Republicans need to pick someone with values to win. Worn out brainless actors and moran drunks won't cut it. America has started to wake up and even the Dems better wake up or you might all be looking for a job.

December 16 2012 at 5:06 AM Report abuse +2 rate up rate down Reply
1 reply to robmist's comment

Robbie darling how sad for you that you wander through life in a state of confusion dear. It was us democrats who pushed for everyone to be able to own a home even if they could not afford it darling.
It is too bad that we have not found a democrat with values yet dear.

December 16 2012 at 10:01 AM Report abuse rate up rate down Reply

Why didn’t this article appear during the campaign? This news agency is in the tank with the Democrats. I hope they stop the tax breaks, so that the liberal Cities can feel the pain of their own stupidity

December 15 2012 at 9:40 PM Report abuse +1 rate up rate down Reply