Grandfather knows best

19 September 2012 By Agnes T. Crane

Washington’s efforts to close the budget gap may threaten the tax-exempt status of municipal bonds. But tinkering with this haven would be easier for new bonds than existing ones. Muni borrowers could face a stark 2013, but recent buyers of the bonds will probably be spared.

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Investors have increased their holdings of U.S. municipal bond mutual funds in 40 out of the last 41 weeks, according to Lipper. More than $21 billion has flowed into the market year-to-date, compared with a $22 billion outflow in the same period a year ago.

President Barack Obama’s fiscal commission in 2010 recommended that the tax-exempt status for newly-issued municipal bonds be eliminated. Obama has called for reducing the tax exemption to 28 percent from the current 35 percent for those in the highest tax bracket.

Automatic tax rate increases and spending cuts, commonly referred to as the “fiscal cliff,” will go into effect in January if U.S. lawmakers don’t change current law by the end of this year.

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