The tax code might change, but not the role of muni bonds

The results of the upcoming general election could significantly impact individual tax policies due to the impending expiration of the Tax Cut and Jobs Act (TCJA) on December 31, 2025. This act, which reduced individual tax rates and modified deductions, may either be extended, changed, or allowed to lapse, depending on the election outcomes.

A Republican victory would likely favor an extension, while a Democratic sweep could result in the Act lapsing or diminishing in impact. A split government may lead to negotiations that could also affect the TCJA’s future.

For municipal bond investors, if tax rates rise, the tax-exempt status of muni bonds will become increasingly valuable, enhancing their attractiveness compared to taxable bonds. However, the expiration could adversely affect taxpayers subject to the Alternative Minimum Tax (AMT), potentially increasing the number of affected individuals and impacting investment preferences.

The current state and local tax (SALT) deduction cap of $10,000 also influences municipal bond attractiveness in high-tax areas. Should this cap be lifted, it might alleviate tax resistance for state and local governments but the overall impact remains uncertain.

Investors should be vigilant and prepared for potential tax code changes.