In 2019, municipal bonds have been enjoying their best start to a year since 2006. Muni-bond funds amassed about $15 billion in assets in the first eight weeks of the year, the maximum in 13 years, per net inflows tracked by Municipal Market Analytics, as quoted on Wall Street Journal.
Muni bond investing was thought to lose luster amid Trump tax plan. As we all know, municipal bonds are excellent choices for investors seeking a steady stream of tax-free income. But with President Trump putting into effect a tax reform last year, which aimed at slashing tax rates, investors’ desire for a tax shelter in munis was supposed to be quelled.
But despite tax reform, muni bond ETFs have been soaring in 2019. Let’s find out what is driving investors toward munis (read: Trump Tax Plan & Muni Bond ETFs: What Investors Need to Know).
Some States End Up Seeing Higher Tax Rates
There is a limitation on the deductibility of state and local taxes (the SALT deduction) from federal taxes for taxpayers of the said states. The etf.com article went on to mention that “even with the reduction in the maximum federal individual income tax rate from 39.6% to 37%, the cap on the SALT deduction means the combined state and federal maximum effective income tax rates went up in seven states.” These states include California, Connecticut, Minnesota, New Jersey, New York, South Carolina and Wisconsin.
Democrats’ Tax-the-Rich Plan
A divided congress in the United States has been boosting munis. Investors should note that Democrats are preparing for the 2020 presidential campaign with a host of “tax-the-rich proposals.”
Such proposals include levy of taxes on financial trades, tax credits paid through rolling back some tax cuts, tax on estates with a value above $3.5 million and taxing households with a wealth above $50 million, tax at 70% on income over $10 million, making maximum marginal tax rate at 90% and so on, per Bloomberg.
The move will address the rising dissatisfaction with income inequality, per Bloomberg. The Democratic capture of the House of Representatives in midterms in 2018 has only strengthened the possibility.
U.S. citizens are currently under the tax season which runs from Jan 1 to Apr 15 of each year. During this time, individual taxpayers normally prepare financial statements for the previous year and file annual tax return by Apr 15. No wonder, munis will attract huge attention.
Munis Are Hot
All these perked up demand for muni bonds, which are safer than corporate bonds and yield higher than treasuries. Below we highlight a few muni bond ETFs that have gained considerably in the past month (as of Mar 6, 2019) beating the treasury ETF iShares 20+ Year Treasury Bond ETF (TLT - Free Report) (down 0.4%) (see all Municipal Bond ETFs here).
New York Amt-Free Municipal Bond Invesco ETF (PZT - Free Report) — Up 1.0%
Franklin Liberty Municipal Bond ETF (FLMB - Free Report) — Up 0.9%
Xtrackers Municipal Infrastructure Revenue Bond Fund (RVNU - Free Report) — Up 1.5%
VanEck Vectors AMT-Free Intermediate Municipal Index ETF (ITM - Free Report) — Up 1.02%
American Century Diversified Municipal Bond ETF (TAXF - Free Report) — Up 0.9%
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