Implications of the Tax Cuts and Jobs Act for Municipal Bond Investors

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The 2017 Tax Cuts and Jobs Act will impact advisors and muni bond investors. Here’s what they should expect moving forward in 2018.

The Act’s most obvious change is a reduction in the highest marginal Federal tax rate from 39.6% to 37% for married filers earning more than $600,000, beginning this year. However, the Affordable Care Act’s 3.8% surtax on annual investment income over $200,000 remains as does the ACA’s 0.9% increase in Medicare taxes.

For those investors living in relatively high-income, property, and sales-tax states, limitations on the deduction of state and local taxes (SALT) will boost their adjusted gross income. This could cause an increase in federal taxes, all other things being equal. Along with the reduction of SALT, the standard deduction has been raised by nearly 90% to $24,000 for married couples, up from $12,700 in 2017.

In addition, the bill has particular significance for wealthy investors who will own homes with high leverage. They can expect their mortgage interest deductions to be limited on new loans of $750,000 or less, and only on a primary residence. This will hold true until at least 2026, when this and several other provisions in the new tax law are set to expire.