If you haven’t filed your 2012 federal income taxes yet, the clock is ticking. As of today, you have two weeks to get them in by the filing deadline of April 17, 2012.
Like many nationwide debates, Americans are nearly split down the middle when it comes to taxes. Recent data from Gallup shows 50 percent of Americans believe federal taxes are too high while 43 percent believe they’re about right. Note: the responses are “about right” and “too high;” I don’t believe there are many in the “should be higher” camp. However, after 11 years of the Bush Tax Cuts, America’s tax rate structure may shift upward next year. Five of the six tax brackets are set to increase with the largest earners paying nearly 40, up from 35 percent currently.
One way investors can offset higher tax rates is through municipal bonds. In general, interest generated from municipal bonds is exempt from all federal income taxes and some state and local taxes (depending on your state).
While municipal bonds carry a greater amount of risk than Treasury bonds, tax advantages and higher yields make them extremely attractive to Treasuries on a relative basis. The yield on government debt is currently in the doldrums just above 3 percent while the yield on the Bond Buyer 40 Index of munis is above 4 percent.
This gap gets even greater when you consider tax exempt income. The tax equivalent yield on a taxable investment (such as U.S. Treasuries) would need to be more than 6.5 percent to outpace the muni bond index cited above. This means the yield on U.S. Treasuries needs to roughly double from its current level to be attractive to munis on a relative basis.
If you’re writing Uncle Sam a big check this year, consider adding tax-free bond funds to your portfolio. U.S. Global Investors offers two: the Near-Term Tax Free Fund (NEARX), which earned a 4-star rating from Morningstar for the five-year period* and the Tax Free Fund (USUTX). However, investments and tax planning is complicated and each investor’s situation is unique–you should consult a tax advisor to determine whether muni bonds are right for you.
*Among 161, 161, 145, and 87 municipal short-term funds, the Near-Term Tax Free Fund earned 3 stars, 3 stars, 4 stars and 3 stars for the overall, 3-, 5- and 10-year periods ending 12/31/11.
Please consider carefully a fund’s investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.
Morningstar Ratings are based on risk-adjusted return. The Overall Morningstar Rating for a fund is derived from a weighted-average of the performance figures associated with its three-, five- and ten-year (if applicable) Morningstar Rating metrics. Past performance does not guarantee future results. For each fund with at least a three-year history, Morningstar calculates a Morningstar Rating based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund’s monthly performance (including the effects of sales charges, loads, and redemption fees), placing more emphasis on downward variations and rewarding consistent performance. The top 10% of funds in each category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars and the bottom 10% receive 1 star. (Each share class is counted as a fraction of one fund within this scale and rated separately, which may cause slight variations in the distribution percentages.)
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The Bond Buyer 40 Index tracks municipal bond prices of 40 actively traded general obligation and revenue issues rated A or better with a term portion of at least $50 million 75 million for housing issues); at least 19 years remaining to maturity; a first call date between 7 and 16 years; and at least one call at par before redemption.
Tax-exempt income is federal income tax free. A portion of this income may be subject to state and local income taxes, and if applicable, may subject certain investors to the Alternative Minimum Tax as well. Each tax free fund may invest up to 20 percent of its assets in securities that pay taxable interest. Income or fund distributions attributable to capital gains are usually subject to both state and federal income taxes. Bond funds are subject to interest-rate risk; their value declines as interest rates rise. The tax free funds may be exposed to risks related to a concentration of investments in a particular state or geographic area. These investments present risks resulting from changes in economic conditions of the region or issuer.
This information does not constitute tax advice and is provided for informational purposes only. Please consider speaking with a legal or a tax adviser regarding your individual situation.
