Any accountants out there?

[ruadisneyfan2]

I have a very general question about non-retirement investment accounts.
What is the benefit of a tax-exempt municipal bond fund (mutual fund)?
Such as this one.

From what I understand, the growth is not considered taxable income, correct?
Also, if it's not a retirement fund, would you need to declare any withdrawals as taxable income? I am thinking no because income tax was already paid on that income at the time it was earned. If the IRS would make you declare all withdrawals as taxable income, I feel like there would be no point in investing, only to have to pay taxes twice.

Am I way off?

TIA

 

[Mirabell Rose]

An investment with after tax dollars has earnings and sales of the fund, versus the term withdrawal you hear with retirement savings accounts. The earnings can be tax exempt on municipal bounds, but be sure to investigate which levels they are tax exempt as income (federal, state, city) as they may not be at all levels.

 

[ruadisneyfan2]

An investment with after tax dollars has earnings and sales of the fund, versus the term withdrawal you hear with retirement savings accounts. The earnings can be tax exempt on municipal bounds, but be sure to investigate which levels they are tax exempt as income (federal, state, city) as they may not be at all levels.

I was wondering specifically for federal taxes. When you sell, you have to declare it all as income?

 

[Mirabell Rose]

For investments that are not pre tax contributions like regular 401k’s, you only ever pay tax on the difference between the principle cost and what you sold it as. So for example, you bought for $1000. Year 1 you received interest and dividends of $100. In year 1 you owe tax on $100 if not tax exempt bonds. Year 2 you received $100 in interest and dividends, but you used these to buy $100 more of the investment. You still owe tax on the $100 if not tax exempt bonds. At the beginning of year 3 you sell your bonds for $1100. You owe no tax on a sale where the cost, you paid 1000 + 100, equals the sales price. If you sold for 1500, you have a 400 gain over what you bought it for that is taxable. If you sold it for 700 you have a loss that can be used to offset gains in other areas.

 

[Anthony1971]

With this it is best to call up BNY the fund states as below.
To pursue this goal, the fund normally invests at least 80% of its assets, plus any borrowings for investment purposes, in municipal bonds that provide income exempt from federal and New Jersey personal income taxes.

In other words some may be exempt some may not.

I also strongly suggest you understand the risks with the bond market and selling bonds as for a short term you can lose money for long term you will more than likely make money (there is always doubt they are usually very safe investments)
Also understand the fee structure.

What will happen is you will receive a statement that tells you what is taxable every year and this what an accountant will use to figure your taxes.

You are not looking for an accountant's advice you are looking for a financial advisory's advice. As an accountant I have personally looked into these and decided they were not for me. If I could buy a bond direct that may be different, this means keeping track of when they will open and having an inn as the good ones are gone very fast........ BUT I am not you and you are not me. Please call and ask questions after you read as much as can before you throw up for the right questions to decide what is best for you or seek the help of a financial adviser.

In the end you are asking a question that cannot be answered as tax exempt in one or both will vary by bond and being this is a fund that invests in many bonds some will be taxable in the state and or Federal.

 

[Anthony1971]

I will also add if you check the sales charge (these are fees) box at the bottom of the page you reference the gains are in fact negative for the year...
Understand the fees with any mutual fund as a lot of times the fees outweigh any gains you may get above anything else.
Or as I was told in college by a retried investment banker "Invest in an index fund" the fees are low and you will almost always make out better. I did this all my life and did fine with my 401Ks.

 

[ruadisneyfan2]

For investments that are not pre tax contributions like regular 401k’s, you only ever pay tax on the difference between the principle cost and what you sold it as. So for example, you bought for $1000. Year 1 you received interest and dividends of $100. In year 1 you owe tax on $100 if not tax exempt bonds. Year 2 you received $100 in interest and dividends, but you used these to buy $100 more of the investment. You still owe tax on the $100 if not tax exempt bonds. At the beginning of year 3 you sell your bonds for $1100. You owe no tax on a sale where the cost, you paid 1000 + 100, equals the sales price. If you sold for 1500, you have a 400 gain over what you bought it for that is taxable. If you sold it for 700 you have a loss that can be used to offset gains in other areas.

It’s my elderly father’s account that he’s had for years. The IRS sent him a letter listing every sale transaction amount saying he should have declared it all as taxable income. This is on a non-retirement tax-exempt bond fund.

He has an appointment with an accountant but I’m just curious.

 

[ruadisneyfan2]

With this it is best to call up BNY the fund states as below.
To pursue this goal, the fund normally invests at least 80% of its assets, plus any borrowings for investment purposes, in municipal bonds that provide income exempt from federal and New Jersey personal income taxes.

In other words some may be exempt some may not.

I also strongly suggest you understand the risks with the bond market and selling bonds as for a short term you can lose money for long term you will more than likely make money (there is always doubt they are usually very safe investments)
Also understand the fee structure.

What will happen is you will receive a statement that tells you what is taxable every year and this what an accountant will use to figure your taxes.

You are not looking for an accountant's advice you are looking for a financial advisory's advice. As an accountant I have personally looked into these and decided they were not for me. If I could buy a bond direct that may be different, this means keeping track of when they will open and having an inn as the good ones are gone very fast........ BUT I am not you and you are not me. Please call and ask questions after you read as much as can before you throw up for the right questions to decide what is best for you or seek the help of a financial adviser.

In the end you are asking a question that cannot be answered as tax exempt in one or both will vary by bond and being this is a fund that invests in many bonds some will be taxable in the state and or Federal.

I will look back at his year end statements. IIRC it listed only capital gains. He definitely needs an accountant because he may need to file an amended return. I just don't understand how they can call 100% of each withdrawal/sale/cash out income.

 

[_19disnA]

I think what you are asking is less about advice on which bond fund to buy (which I thought was what your original post was asking), but how to handle the associated taxes. Every investment I have ever owned (regardless of the type of investment) sends out yearly statements when there are taxes to be declared. If you sell part of some investment during the year will also generate documents regarding taxes. Each company who operates any sort of investment applies the relevant tax laws and sends each client the statements regarding taxable liability. It isn't something each person has to try to figure out on their own.

Who has been doing your father's tax returns and has he been providing them all of the various tax related documents he has received? Perhaps he didn't understand what he was getting in the mail and/or didn't realize it was something to provide his accountant when preparing the annual tax returns. Some funds may only provide that information on their website and you (or your father) need to access those websites to print the documents required for his annual tax returns.

 

[tvguy]

Not an accountant, but buying tax free municipal bonds often are a retirement strategy to reduce tax liability in retirement even if the actually account isn't a retirement account like an IRA.. It was my mom's financial planner's strategy and it served her well. She was retired for 28 years and didn't have enough taxable income for 27 of those years to even hit the minimum threshold to file income taxes. The one year she did file, an investment she made 40 years before came due with taxable income that pushed her over the minimum. It should be noted that my mom retired in 1985, and had limited funds in IRAS and never had a 401k option at work.
It is the same strategy. we are employing, but only about 25% of our investments are in tax exempt municipal bonds. The vast majority of our investments, however, are in IRAs with money from rolled over 401ks and tax laws mean any withdrawals are going to be taxable, so no advantage to putting that money in tax exempt investments. Until this year when we started drawing Social Security, we had been drawing down some of that money as we retired early, 3 years before we qualified for our full Social Security. We have halted those withdrawals and won't resume them for 6 years when mandatory minimum withdrawal laws kick int. Long story, but hopefully our taxable withdrawals will be low enough to reduce any tax liability, but we won't be as lucky as my mom to be below the level to have to file taxes. Congress has a habit of changing laws to eliminate tax advantages. When my mom started her mandatory minimum withdrawals, she was allowed to set it up in such a way that when she passed, I could withdraw it all, and pay taxes, or continue the distributions at the amount she was taking and have a smaller tax bite. Our kids, will not have that option. Now, they will have 10 years after we both pass to cash in our IRAs and pay taxes,.

 

[lorimt]

The interest and dividends paid on the fund is tax free but if you sell the fund and there is a capital gain, you have to pay taxes on the gains.

 

[lanejudy]

It’s my elderly father’s account that he’s had for years. The IRS sent him a letter listing every sale transaction amount saying he should have declared it all as taxable income. This is on a non-retirement tax-exempt bond fund.

He has an appointment with an accountant but I’m just curious.

It needs to be reported as income even though whether or not it's actually taxable depends on various factors. And even if non-taxable in regards to Federal Income Tax, it may still impact in other ways (whether/how much social security benefit may be taxed, medicare premiums, state/local taxes, etc.).

Do you/he have copies of his previous tax returns? Were the municipal bonds claimed? If an accountant did his returns possibly he didn't share the 1099-INTs -- or in recent years sometimes those aren't sent as paper copies but must be downloaded electronically.

 

[Mirabell Rose]

I will look back at his year end statements. IIRC it listed only capital gains. He definitely needs an accountant because he may need to file an amended return. I just don't understand how they can call 100% of each withdrawal/sale/cash out income.

On your taxes you have to provide both the sale amount as gross income and then deduct the cost basis to get net taxable income. Sometimes the IRS wording is different than you would call something. When they say he has to report as income, he does, but this will than enable him to take a deduction for the cost basis. He should consult with a tax accountant to file any amended returns needed as another response noted.

 

[ruadisneyfan2]

Thanks everyone. He has a degree in accounting though he worked in construction all his life (long story) so he always did his own taxes and taught me how to do mine which are far less complicated.
Lately, he is developing dementia so I have been doing his too but clearly we need an accountant to handle them from now on. I do list capital gains on his return and whatever is listed on the year end statements his investment banks sent him.
His dementia is not so bad that he doesn’t know who we are. He knows which forms need to be saved for tax time and that it’s a tax exempt account. He wouldn’t know if he took his medicine this morning.

We have an appointment with an accountant in early Jan but I am curious so I thought I’d ask here.

 

[ruadisneyfan2]

It needs to be reported as income even though whether or not it's actually taxable depends on various factors. And even if non-taxable in regards to Federal Income Tax, it may still impact in other ways (whether/how much social security benefit may be taxed, medicare premiums, state/local taxes, etc.).

Do you/he have copies of his previous tax returns? Were the municipal bonds claimed? If an accountant did his returns possibly he didn't share the 1099-INTs -- or in recent years sometimes those aren't sent as paper copies but must be downloaded electronically.

In the past, when my mom was alive, they rarely touched this fund but with so much cost of living increasing and not having my mom’s SS anymore, we have been writing checks more from this account than years ago.