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Show Municipal Bonds impacted by Tax Reform By CURTIS G. MARSH Financial Consultant Sbearson Lehman Brothers While tax-free municipal bonds still hold considerable allure for investors, in-vestors, tax reform has had an impact im-pact on this market. What the new law has not altered is the distinct combination of qualities that has always made tax-exempt municipals municip-als a desirable investment: safety, flexibility, liquidity, and tax-free income. In general, tax reform has increased in-creased the benefits of investing in municipal bonds to a broader range of investors. Because the maximum max-imum tax rate has been lowered to 28 percent, a broader spectrum of people will fall into this bracket. Forexample, one investor with a taxable income of $30,000 will be in the same 28 percent tax bracket as an investor with $500,000 in taxable tax-able income, and both will receive identical after-tax incomes from the same municipal bond. To determine how municipals can help you meet your investment goals, it is important to understand what has changed under the new law. When analyzing these changes, one date is important to note: August 8, 1986. Both types of municipal bonds, governmental bonds and private activity bonds, issued before this date continue to be tax-free. Governmental municipal bonds are issued by state and local governments gov-ernments to finance the building of roads, schools and other facilities. Under tax reform, a governmental municipal bond issued after August 8, 1986 continues to be tax-free if no more than 10 percent of its proceeds pro-ceeds benefit any single private entity. en-tity. This qualification generally is not expected to have a dramatic impact on the governmental municipal muni-cipal bond market since these bonds usually benefit the general public. Tax reform has had a stronger effect on the private activity muni cipal bond market because it imposes im-poses more stringent requirements on issuers. Private activity bonds are used to finance nongovernmental non-governmental activities such as non-profit hospitals and universities, universi-ties, student and veteran loans, single family construction and multi-family rental housing. With the major exception of bonds issued for non-profit hospitals and universities, univer-sities, a state can issue private activity bonds during 1987 up to a limit of $75 per state resident or $250 million total, whichever is greater. Beginning in 1988, these limits are further reduced to $50 per resident or $150 million total. These new restrictions on private pri-vate activity bonds have dramatically dramatic-ally limited the number of new issues coming to market. For example, ex-ample, approximately $200 billion of municipal bonds were issued in 1985. Since tax reform took effect, it is projected that less than $100 billion will be issued by year-end and in subsequent years. Tax reform affects private activity activ-ity bonds in another way. Bonds issued on or after August 8, 1986 again, with the exception of nonprofit non-profit hospitals and universities may subject you to the alternative minimum tax, or the AMT. The AMT applies primarily to high-income taxpayers with substantial sub-stantial tax deductions. To keep private activity bonds attractive to investors concerned about the AMT, these bonds may carry an additional yield of one-quarter to one-half percent. This additional yield creates an excellent opportunity oppor-tunity for investors who are not subject to the AMT. Municipal bonds continue to offer solid investment opportunities opportuni-ties after tax reform. Your Financial Finan-cial Consultant can tell you more about municipal bonds and how they may help you to achieve your overall financial goals. |