Navigating the Future of Municipal Bonds After the Tax Cuts and Jobs Act

The Tax Cuts and Jobs Act (TCJA) was a major overhaul of the U.S. tax code that was passed in January 2018. Many of its provisions are set to expire after 2025, which could have significant implications for investors and municipal bonds in particular. Here are five key points to consider:

1. Higher tax rates could lead to increased demand for municipal bonds, as the tax-exempt status becomes more valuable for individuals in higher tax brackets.

2. The number of taxpayers subject to the alternative minimum tax (AMT) could increase dramatically if the TCJA expires, impacting the tax benefits of certain municipal bonds subject to the AMT.

3. The lifting of the state and local tax (SALT) cap could benefit residents in high-tax states and improve the credit quality of municipal issuers in those states.

4. Discussions around changes in tax law could lead to accelerated bond issuance, but the elimination of the tax exemption for municipal bonds is unlikely.

5. The tax exemption for municipal bonds is essential for financing U.S. infrastructure and is unlikely to be eliminated. However, if it were to be eliminated, current tax-exempt munis would become more valuable.

As the future of the TCJA becomes clearer, investors should consider revisiting their muni bond strategy and making portfolio adjustments to take advantage of potential changes in tax law. Now is the time to plan for the future and position your portfolio accordingly.