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Prepared to purchase muni bonds once more? Take into account this hidden tax


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After a tough interval for municipal bonds, often known as muni bonds, investors may be returning. However there is a hidden tax retirees want to contemplate earlier than piling in.

Whereas weekly inflows for U.S. muni bond funds have been unfavorable for many of 2022, outflows dropped considerably final week, in response to Refinitiv Lipper knowledge, signaling curiosity in larger yields and credit score energy.

Muni bonds typically keep away from federal taxes on curiosity and should bypass state and native levies, relying on the place you reside, boosting the attraction amongst larger earners.

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Nonetheless, muni bond curiosity could create an issue for prosperous buyers: Medicare premium hikes.

“There are plenty of shifting components, and you could have somebody take a look at it holistically,” mentioned Matthew Chancey, an authorized monetary planner at CoastalOne in Tampa, Florida.

Greater premiums and taxes

Though tax-exempt muni bond curiosity could also be interesting, these earnings could improve Social Safety taxes and Medicare premiums, mentioned Tracy Sherwood, a Williamsville, New York-based CFP at Sherwood Monetary Administration. 

That is as a result of the formulation for Social Security taxes and Medicare Part B and Medicare Part D use so-called modified adjusted gross earnings, or MAGI, which incorporates tax-exempt muni bond curiosity.

If half of Social Safety funds plus MAGI is greater than $44,000 for a joint tax return ($34,000 for particular person filers), as much as 85% of Social Safety advantages could also be taxable.

However with comparatively low thresholds, it is troublesome for some higher-income retirees to keep away from paying tax on 85% of Social Safety funds, Sherwood mentioned. 

The larger challenge is that retirees with earnings above sure thresholds could owe a surcharge for Medicare Half B and Half D often known as the Earnings Associated Month-to-month Adjustment Quantity. 

The bottom quantity for Medicare Half B premiums in 2022 is $170.10 per 30 days, a 14.5% jump from 2021. Nonetheless, the funds begin to improve for joint filers with MAGI over $182,000 (single filers above $91,000).

“That is the place you are [Medicare Part B] premiums going up by about $70 or extra per 30 days,” mentioned Sherwood. “That is fairly vital.”

The highest Medicare Half B surcharge is $578.30 for {couples} submitting along with MAGI at $750,000 or above.

Retirees may see premium will increase for Medicare Half D, which usually covers prescribed drugs, with the highest surcharge at $77.90 for the very best earners in 2022.

Each calculations use MAGI from two years prior, so retirees want to contemplate the implications of their earnings upfront, Sherwood mentioned.

“It is one thing that taxpayers appear so conscious of as a result of in the event that they get into this larger bracket, they should pay larger premiums for a full yr,” mentioned Mary Kay Foss, licensed public accountant and CPA college at CalCPA Training Basis in Walnut Creek, California.

Further taxes and premiums do not imply retirees ought to avoid muni bond investing. Nonetheless, they might take into account weighing the professionals and cons of tax-exempt curiosity with a monetary advisor. 

“There isn’t any such factor as a great or a nasty product,” Chancey mentioned. 

Retirees must assess every funding in its totality — together with threat, yield, progress potential, tax implications, creditor safety and extra, he mentioned. “I take a look at each funding, and I ask myself this query: ‘Is the juice well worth the squeeze?'”



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