Federal tax legislation is expected to pass in 2001. Among the expected changes, tax brackets may be lowered. If that’s the case, investments paying dividends and taxable interest would be more attractive. That is, you’d get more of a return, aftertax, from government and corporate bonds. High-dividend stocks such as electric utilities and real estate investment trusts (REITs) also would offer a greater payoff.
But tax-exempt bonds and bond funds would be less appealing. The higher your tax bracket, the greater the benefit of tax-exempt bonds, so lower brackets would reduce the return from municipal bonds. Therefore, if you’re considering the purchase of munis, it may pay to wait until specifics of a new law are revealed and prices drop. Regardless of new legislation, after you retire you may want to reduce your muni holdings if your tax bracket drops in retirement.
