This may come as no surprise to you, but I'm no big fan of big government. It's bloated. It's broken. And it spends entirely too much time figuring out ways to bleed us dry.
And it doesn't matter if our incomes are rising or falling, the government always wants more. That irks me to no end.
Because let's face it, while the government thinks nothing of asking you to get by with less, it never has any intention of living within its own means—that's how you end up $53 trillion in debt in the first place.
Then again, that's part of our twisted national Carpe Diem. Except we seize the day at the expense of our future.
So instead of getting a $160 billion dollar program to become energy independent, we get stimulus checks to blow at Wal-Mart.
Yeah that's the ticket.
Big Government is Bad News for Investors
However, the bad news for taxpayers and investors is just beginning. The federal government is about to grab an even bigger slice of their wallets. Without action, the Bush tax cuts are scheduled to sunset at the end of 2010.
Here's a quick look at what that will mean for investors both big and small:
- Tax rates will rise substantially, as the top bracket jumps back to 39.9% in 2011 vs 35% today;
- Low-income taxpayers will see the 10-percent tax bracket disappear, and they will have to pay taxes at the 15-percent rate;
- Married taxpayers will see the marriage penalty return;
- Taxpayers with children will lose 50 percent of their child tax credits;
- Taxes on dividends will increase beginning on January 1, 2009;
- Taxes on capital gains will increase, also beginning on January 1, 2009 jumping from 15% to 20%;and
- Federal death taxes will come back to life in 2011, after fading down to nothing in 2010.
In short, it's game on again. That's why you need to seriously consider municipal bonds funds as a defense against these characters and their busted budgets.
Municipal Bond Funds Beat the Tax Man
Here's why.
The interest from investing in municipal bonds is exempt from federal income tax and in many cases, state and local taxes as well. So they provide an income stream the boys in D.C. can't get their hands on unless you sell the bonds for a capital gain. Only then they're taxed.
That makes municipal bonds one of the easiest tax shelters on the market today. And you don't have to be rich to take advantage of them, even though the wealthy have been on to these benefits forever now.
In fact, according to the most recent data from the Internal Revenue Service about 59 percent of the interest from municipal bonds in 2006 was paid to households that earned more than $200,000. All of it, of course, was free of federal taxes.
Smart investors will only follow them since the end of the tax cuts is getting gets closer and closer every day now. However, the time to plan for this sunset is now.
Municipal Bond Investments
As for municipal bond investments, how could you consider them without looking for something from PIMCO. It's the company run by the bond king himself, Bill Gross.
In fact, the PIMCO Municipal Income Fund (NYSE:PMF) is everything an investor could ask for these days. It pays a hefty yield and it's safe.
That's no small matter in a bear market.
In fact, according to PIMCO, muni bonds are so safe that from 1970 to 2005, the average investment-grade municipal bond defaulted a mere 0.07% of the time, compared with 2.23% for corporate bonds.
Heck, even Orange County, made good on its debt when dealing with its high-profile bankruptcy in 1994.
The best part though is the yield. Its current yield is 6.06% which is the taxable equivalent of 9.04% if you're in the 33% tax bracket.
To calculate your taxable equivalent, of course, you simply divide the yield of your fund by (1.00 minus your marginal tax rate)
For example, to figure out the taxable equivalent yield for this fund in the 33% bracket, you would divide its 6.06% yield by (1-.33). That gives you a yield of 9.04%. Not bad.
And if the Bush tax cuts do expire and you suddenly find yourself in the 39.6% bracket again your taxable equivalent yield jumps to 9.93%. That's double what you can get from a bank and is far above the current U.S. Treasury yields.
Furthermore, the fund seeks to be "AMT-free" by avoiding bonds generating interest that may subject individuals to the alternative minimum tax. On top of that, it also pays its dividends monthly.
So don't think for a minute that municipal bonds are just something for the retiree crowd.
They're also a great way to keep the government out of your wallet while you build wealth.
After all, it is the government that needs to learn to live on less—not the rest of us.
Your tax-shelter-hunting analyst,
Steve Christ
Investment Director, The Wealth Advisory
PS. If beating the tax man appeals to you, I have developed a 5-stock portfolio of income investments that can send you on your way wealth without risks. It's a mix of dividend stocks and municipal bond funds that pay income ranging from 6.23% to 9.14%. To learn more about them click here.
