Planning Briefs
Swap Munis To Your Tax Advantage
Published Tuesday, November 22, 2016 at: 7:00 AM EST
You probably already know about the tax advantages of municipal bonds. The income generated by "munis," as they're often called, is normally exempt from federal income tax, and it may not be taxed by your state, either, if your state issued the bonds. Moreover, income from munis doesn't count toward the 3.8% tax on net investment income (NII). That may help you avoid or reduce the NII tax.
But there's yet another tax-saving aspect of munis that often is overlooked. If you "swap" munis in the secondary market, you can generate a loss from the transaction. That loss, like other investment losses, can offset capital gains and as much as $3,000 of ordinary income. This strategy may be especially valuable if you realized short-term gains during the tax year in question.
To get those benefits, investors often swap munis at the end of the year, when they have a clear picture of the tax consequences. But this strategy can be implemented at any time. And if you wait until the year is drawing to a close, it may be harder to find a suitable match.
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