The Home Methods and Means Committee part of the $3.5 trillion tax and spending invoice consists of myriad tax carve-outs and credit for liberal particular pursuits. Drawing specific consideration from the rich in Greenwich and Silicon Valley is an exemption for municipal bonds from a 3% income-tax surcharge.
The proposed 3% surcharge applies to modified adjusted gross earnings (MAGI) above $5 million a yr. A taxpayer’s MAGI consists of some deductions which are excluded from AGI comparable to tax-exempt curiosity for municipal bonds. The IRS makes use of MAGI moderately than AGI to find out a taxpayer’s eligibility for a number of deductions, together with IRA contributions.
Democrats are making use of the three% surcharge to MAGI to seize extra of excessive earners’ earnings and restrict tax arbitrage. So a taxpayer with an AGI properly under $5 million might get soaked. But the invoice carves out curiosity from muni debt from MAGI in order that states and cities don’t get caught within the backwash.
Many excessive earners use muni bonds to keep away from taxes. Muni bonds are particularly worthwhile in states with excessive income-tax charges like California and New York as a result of they’re additionally exempt from state and native taxes. Traders have poured into muni bond funds this yr as Democrats have threatened huge tax will increase. This has pushed down muni-bond yields to document lows and decreased borrowing prices for states and cities. The S&P muni-bond index was yielding a mere 1.07% on Friday.
State and native governments raised alarms that the three% surcharge, if utilized to curiosity on municipal bonds, might scale back their worth to buyers and lift borrowing prices. Abruptly, California and New York might need to pay extra to fund their bloated governments.
“We had been involved that this proposal, if applied, might impression tax-exempt curiosity as properly, and can be bearish for municipals,”
defined in a analysis observe final week. “Nevertheless, primarily based on suggestions from tax specialists and Methods and Means Committee employees, we now imagine that the three% surcharge is not going to apply to tax-exempt curiosity.” Sighs of aid throughout in Albany, Springfield—and the
The surcharge will increase the highest marginal income-tax charge to 46.4%, together with the three.8% web funding tax. Add state and native taxes and the rich in Silicon Valley and New York might pay some 60% of their earnings in taxes. However they’ll pay nothing on munis. Some tax avoidance schemes are apparently extra equal than others.
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Appeared within the September 28, 2021, print version.