Tax-Exempt Municipal Bonds Remain Tax-Exempt, For Now

Last night’s 11:00pm House vote, which raised taxes by roughly $600 billion over 10 years, does not appear to directly address treatment of income from tax-exempt municipal bonds.  What's clear this morning is that the bill creates a new highest income tax bracket (39.6%) and raises long-term capital gains taxes (from 15% to 20%) for families with incomes (after deductions) above $450,000.  Remember, tax-exempt interest income is not a deduction or personal exemption.  If (as it currently appears) the tax status of tax-exempt municipal bond interest remains unchanged, muni bonds are likely to outperform over the next several months as higher taxes increase their value and the budget negotiations shift from revenue increases to spending cuts.  Happy New Year!