Pros and Cons of Municipal Bonds: A Balanced View
|
|
Typically, municipal bonds (often called “munis” for short) appeal to investment-savvy taxpayers. However, there are a number of potential tax drawbacks to watch out for. Here's an overview from both sides of the fence.
Tax Pros of Munis
- Interest income from munis is exempt from federal income tax. This is important for taxpayers in a high tax bracket. For example, if you are currently in the top 37% tax bracket under the Tax Cuts and Jobs Act (TCJA) and you earn a 4% yield from a muni, the equivalent yield for a taxable investment is 6.92%.
- The interest income is generally exempt from state income tax for munis issued within the state where you reside. In effect, this additional tax break increases the after-tax return.
- Any muni interest income does not count in the calculation of your adjusted gross income (AGI). Therefore, investing in munis can provide other tax savings when you file your annual federal tax return.
- Similarly, muni bond interest income does not count in the calculation of the 3.8% tax on “net investment income” (NII). Unlike most other income items, it cannot increase or trigger the NII tax.
|
|
Tax Cons of Munis
- The interest income received from munis issued by an entity in another state is subject to state income tax in applicable states. The state tax exemption, when available, only applies to munis issued from your home state.
- There is no tax benefit if you sell a muni purchased at a premium. For instance, if you buy a muni for $10,500 that will be worth $10,000 if you hold it until maturity, you cannot subsequently claim a $500 loss on your tax return. The premium must be amortized over time.
- The income from certain “private activity” bonds (e.g., bonds used to build certain parking garages) is an adjustment item for purposes of the alternative minimum tax (AMT). This could force you to pay the AMT instead of regular income tax or increase existing AMT liability.
- If you sell a muni at a profit, you owe capital gains tax on the sale. Say you acquire a muni with a face value of $10,000 and sell it for $11,000. The $1,000 gain is taxable as a capital gain.
- The calculation of the tax on Social Security benefits includes tax-free municipal bond income. Depending on your situation, up to 85% of the Social Security benefits received may be subject to tax.
|
|
Finally, be aware of a popular year-end tax technique involving munis. If you “swap” a muni showing a current loss with another bond with somewhat different investment characteristics, you may be able to claim the loss on your 2019 return, even if the new bond carries a higher interest rate than the old one. Because such a swap is actually a
simultaneous sale and acquisition, it is not subject to the recent TCJA crackdown on like-kind exchanges.
In summary
: Munis can be a good deal for astute investors, but you should still proceed with caution. Weigh all the pros and cons before you invest and please let us know if we can be of service to help you evaluate how municipal bonds might help
you
.
|
|
New IRS Pin Numbers Will Help with Identity Theft
|
|
When the IRS begins the 2020 tax filing season, taxpayers in selected locations will be eligible to opt into the online
Identity Protection (IP) PIN program.
Taxpayers will be eligible for this voluntary program if they filed a federal tax return last year from Arizona, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia,
Illinois, Maryland, Michigan, Nevada, New Jersey, New Mexico, New York, North Carolina, Pennsylvania, Rhode Island, Texas and Washington.
The IP PIN is a 6-digit number that adds another layer of protection for taxpayers’ Social Security numbers and helps protect against tax-related identity theft. The IRS has issued IP PINs to confirmed identity theft victims since 2011. In recent years, the IRS has been expanding the program to taxpayers who are not confirmed identity theft victims but who may want this additional protection.Taxpayers opting into the IP PIN program must use the online Get an IP PIN tool by visiting
IRS.gov/IPPIN. [Note: this website is being updated and the IRS recommends visiting this site in January 2020.]
|
|
Here are a few factors taxpayers should consider:
- The identity verification process is, by design, rigorous. Not everyone will be able to authenticate their identities and obtain an IP PIN.
- Taxpayers cannot call the IRS to obtain an IP PIN. The IRS is working on alternatives to the online process, but one is not yet in place.
- A new IP PIN must be obtained each year from the online tool.
- Taxpayers should never share their IP PIN with anyone but their tax preparer to file their tax return. The IRS will not call or email to request an IP PIN. People should be on guard against identity thieves seeking their IP PINs.
Before making this program available nationwide, the IRS is expanding it in phases to ensure there is no adverse impact on existing systems. After the 2020 filing season, the IRS will decide whether to add additional states or expand nationwide.
|
|
Speaking of Social Security...
|
|
Social Security taxes will be increasing in the new year.
The Social Security Administration (SSA) recently announced that the “wage base” is jumping to $137,700 in 2020 from $132,900 in 2019, a $4,800 hike. The Social Security tax rate remains at 6.2% while the 1.45% Medicare tax continues to apply to all wages. Plus, an extra 0.9% tax applies to single filers with income above $200,000; $250,000 for joint filers.
If you have questions regarding how this this increase may affect you and your financial picture, please contact us at 630-653-1616.
|
|
Our People Make a Difference
|
|
Congratulations to
Becky Howell
w
ho was just promoted to manager of the accounting services department here at Mathieson, Moyski, Austin & Co.!
Becky joined MMA & Co. in September of 2016, but she wasn't a stranger to the firm. In fact, she was a client. Becky, whose promotion was announced at the company's annual holiday party, shared that she was thrilled to receive Mike Moyski's call three years ago to join the MMA & Co. team.
A native of the Illinois side of the Quad Cities (Moline), Becky is not your average accountant--not that there is such a thing. She holds a business degree from Black Hawk College and a bachelor of arts degree from Moody Bible Institute. When she isn't working hard on our clients' accounting needs, she enjoys singing, baking and being with her extended family, including her nieces and nephew and their adorable children.
|
|
Iqra Majid
, our staff accounting intern, recently returned from a pilgrimage (Umrah) to Mecca. We asked her to share about her visit and here is her story:
|
|
"My November trip to Medina and Mecca in Saudi Arabia as a volunteer for
Muhsen
(Muslims Understanding & Helping Special Education Needs) was very touching. I had a different perspective because I was a volunteer, as well as someone who was being helped by a volunteer. I was helping an elderly woman,
Farah Naz,
who is a refugee from Afghanistan [
pictured here with Iqra, L, and
Hadeel Abderrhaman
of the
Muslim Leadership Academy
, R
]. She didn’t speak the languages that were spoken in Saudi, so I helped her navigate and complete the religious obligations she wanted to do. We had other volunteers helping people who were quadriplegic or paraplegic and others who have autism, Down syndrome and other special needs. We had a total of 100 people in our group, including 30 volunteers!
|
|
"My younger brother
Tayab
has Down syndrome and this trip was truly incredible for him. He had multiple volunteers taking care of him so that my parents could go pray. Not once did he feel like he didn’t belong. This is tremendous for him because we often find him and our family in situations where he is not welcome or accommodated for. The amount of love our family received was very heartwarming, and I’m excited to help and see how Muhsen spreads this love to other families as well."
|
|
Our leaders lead...
Jim Mathieson
, CPA, retired co-founder of MMA & Co., presented the
Brinkman Community Leadership Award
to
Mike Benard
, executive director of the
Wheaton Park District
, at the
Wheaton Chamber of Commerce
December luncheon. Jim received the Brinkman award in 2018 and followed the tradition of presenting this year's award to the 2019 winner. As a colleague and friend, Jim shared about Mike's many contributions to the community, serving as a vital connector between the park district and the people and organizations like the chamber with whom the park district has partnered.
|
|
Brian Eisenmenger
, CPA, partner, recently took to the road to share his knowledge and expertise on estates and trusts, retirement plans and gift taxes with
Thomson Reuters
program participants. Brian, who has been a "faculty member" with Thomson Reuters for more than 10 years, traveled to Rockville, MD, and Roanoke, VA, in November to teach about tax-related issues including fiduciary returns, partnerships and corporate dissolution. Brian is also on the adjunct faculty of
Northern Illinois University
where he teaches in the masters of taxation program.
|
|
The first weekend of December wasn't quite balmy, but it wasn't bone-chilling cold, either--just right for the
Lions Club 5K Reindeer Run.
Team MMA & Co. showed up ready to walk, run and have some fun, all in the name of charity. The Reindeer Run is presented in partnership with the
Wheaton Park District
and
Lions Club Charities
, benefiting programs that support the visually and hearing impaired.
|
|
Celebrating Mike Moyski's Years of Service
|
|
On December 5 we hosted a
Holiday Open House and Retirement Party for
Mike Moyski, CPA. Words can't express our appreciation and admiration for Mike, although
Ron Austin, CPA, the firm's new managing partner, did a great job honoring Mike with a toast. Our many clients, colleagues, friends and family joined us to thank Mike for his many years of service and send him off in style. Here are just a few photos that capture the magic of the evening. [Photos by
Brittney DeMik Photography]
|
|
We end this last newsletter of the year on a note of joy and sadness as we say goodbye to Mike, wishing him all good things as he takes on this new adventure of retirement. Thanks to his wife
Tori
, daughter
Jenny
and son
Mike
and their families who shared him with us all these years.
And in the spirit of the holidays, we wish you and your family a Happy New Year! Please let us know how we can help you in the year ahead--see you in 2020.
|
|
Ron Austin, CPA
Brian Eisenmenger, CPA
Brian Hagene, CPA
Brett Mathieson, CPA
Mike Moyski, CPA
John Straus, CPA
|
|
Please connect with us on Twitter and "Follow" us on LinkedIn!
|
|
|
|
|
|
|