Over the last few months, investors have been mulling over the idea of an increased capital gains tax for certain individuals. This alleged tax reform is slatted to impact investors with over $1 Million in annual income. The taxation is on any capital gains that are made over $1 Million; the new long-term rate was said to be raised from 20% to 40%. The other key piece of information is that the White House announced it could be retroactive to the date of announcement, meaning every capital gain realized after May 2021. As of last week, there have been discussions of moving that 40% down to around 26%. This could change the mind set of many investors; however, with so much uncertainty looming, it is very important for everyone to become educated on tax advantaged alternatives for investments.
One tax free investment that has gained immense popularity in the last year is the Municipal Bond (Muni). Munis are tax free bonds that can come in individual bond certificates as well as in exchange traded funds (ETFs). These bonds are issued by state and local governments to gather cash flows for projects such as roads or buildings. Typically, Munis are free from both federal and state income taxation. It is important to understand where Municipal Bonds will fit in your portfolio. Since Munis are nontaxed investments, they will fit in taxable accounts; individual brokerage accounts, joint accounts, pledged asset line (PAL) accounts. Unfortunately, they do not make sense to hold retirement accounts, IRA/ROTH, because those accounts accumulate capital gains untaxed until the money is withdrawn at 59 ½ years of age. For more information on investing strategies and holdings updates please continue to tune into our blog Wednesday afternoons.