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Subject:  Re: Municipal bonds: A train wreck waiting to ha Date:  12/6/2012  4:22 PM
Author:  ptheland Number:  410678 of 454819

anyone with a bond calculator and a knowledge of financial history knows that investment-grade munis like mine are priced at bubble levels.

There is a new pressure on the demand side of that market which will tend to keep inflating that bubble.

Some here are likely aware that beginning in 2013 there is an additional tax of 3.9% on the investment income of certain higher income individuals. This is not a fiscal cliff issue - it was agreed to as part of the way to pay for the Affordable Care Act.

The IRS recently issued some proposed regulations regarding the operation of this tax. One item is particularly interesting:

Municipal bond interest will not be subject to this tax.

Combine this new tax with the possibility of increased taxes on dividends next year, and there should be a noticeable increase in demand for municipal bonds. That would serve to keep the bubble in municipal bonds inflated for a while longer.

As an anecdote, I just did some analysis for a tax client regarding this issue. I am projecting the tax rate on his dividends will increase from 15% this year (2012) to 32% next year (2013). That's more than double - and he has significant dividend income. I suggested he re-visit his analysis of muni bonds again, as the after-tax picture is changing significantly.

--Peter
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