Thought Leadership

Municipal Tax Exemption and the American Jobs Act

September 18, 2011

Legislators have been discussing possible changes to the municipal tax exemption for the better part of a year now, but the President’s new American Jobs Act (“AJA”) actually brings a formal proposal before Congress. The proposal applies only to those above a “high” income threshold ($250,000 for couples, $200,000 for individuals) and would take effect in 2013. The tax ramifications of this proposal for municipal investors are as follows: (1) Investors paying a marginal rate of 28% or less would be unaffected; (2) Investors in the maximum 35% tax bracket would pay an effective rate of 7% on municipal interest income (if the Bush tax cuts are allowed to expire the maximum bracket rate would increase to 39.6%, and the municipal effective rate would rise to 11.6%). (3) As the taxpayer’s marginal rate approaches 28% the rate would incrementally reduce to zero. One notable uncertainty is the impact of the bill on those subject to the AMT. Language exists within the proposal which seems to imply an additional tax for certain AMT taxpayers. As written, this calculation is highly complex, dependent on a wide range of variables, and would vary considerably depending on a taxpayer’s particular situation.