As tax season winds down, many people were surprised to receive a tax bill and are now bewildered about what to do next. The Tax Cuts & Jobs Act of 2018 eliminated many deductions, including the SALT deduction (state and local tax), charitable contributions for those who don’t itemize, among many other strategies normally applied before year-end to reduce taxes. The only remaining strategy to reduce tax may be by way of investing in tax-free, municipal bonds.
If you’re in a high income tax state, owning municipal bonds will generate interest that’s both state and federal tax-free. If you want to reduce your taxes this year, now’s the time to revisit your investment plan.
Top state income tax rates this year are 13.3% for California, 9.9% Oregon, 4.63% Colorado, 11% Hawaii, and 8.82% New York^1. Depending on where you are on the tax bracket, this can be a big problem since you’re no longer able to deduct these amounts against your federal return.
National muni bond funds are composed of multiple states and rates range from 1.55% for a 1-year bond, 1.9% for a 10-year bond, and 2.66% for 30-year bond.^2 Income is state tax-free up to the amount the fund is invested in your state and is entirely federally tax-free. State-specific bond funds are entirely state and federally tax-free. The iShares California Muni Bond ETF “CMF” has a current yield of 2.04%.^3 The tax-equivalent yield is 4.17%, assuming the highest marginal rates. The iShares New York Muni Bond ETF “NYF” is paying 2.31%, with a tax-equivalent yield of 4.72%^4
At Eureka Wealth Management, I create investment strategies that can mitigate tax, reduce risk, and grow for the future. I also analyze retirement and consult on insurance and estate strategies. Call for a free, initial consultation (760) 537-0791 or online at eurekawealthmanagement.com.