Municipal Security Interest Income's Federal Tax Exemption ... and the proposed Federal "Tax Cap"

September 2011

If you own or are considering investing in (purchasing) Municipal Securities, the recent Federal Government debt limit incident and resulting super committee that will deal with the Federal budget deficit should be a red flag. Then came President Obama's Jobs Bill (American Jobs Act) which is also a red flag. The President and the Federal Government has proposed a "tax cap" on income which would impact the Federal tax exemption of Municipal Security interest income. What this means is that the Municipal Bonds you own and which you thought were tax exempt may not be completely tax exempt.

Depending on your income level, whatever income you report will be Federally taxable. You perhaps remember "AMT" or alternative minimum tax. This new tax cap would be harsher. All income, including all Municipal Bond income, would be covered.

This is not a done deal yet.
However, it has been reported that some Municipal "new issues" have disclosed possible Federal income tax changes in their disclosure stating the tax cap could "lower value and impair marketability."

In my opinion, this tax cap thing is the latest and just the first problem pertaining to Municipal Security interest income and it's traditional Federal tax exemption.