Important Tax Update for DC Residents

Re: Income Tax Secured Bond and Out-of-State Municipal Bonds Amendment Act of 2024

When an investor owns a municipal bond issued by the state or municipality in which they live, the income may be exempt from federal, state, and local income tax. On the other hand, if they own municipals issued by a state other than where they call home, the interest generated by that bond is likely subject to state and local income tax. So, in general, it makes sense for investors to own municipals issued by their home state.

For DC residents, the circumstances are a bit more nuanced.  In 2013, the Council of the District of Columbia enacted legislation repealing the taxation of income from nearly all state and municipal bonds, regardless of where they’re issued.  This offered a significant advantage because, simply put, a DC resident could own a bond from any of the 50 states and the interest earned would be exempt from state-level income taxes. For DC clients, this meant they could own national portfolios, filled with a diverse array of municipals issued by a variety of states.

Unfortunately, based on a new law passed by the Council, this advantage will end at the end of 2024:

“For tax years beginning after December 31, 2024, interest on the obligations of other states and their political subdivisions will be included in District gross income.  Interest earned on obligations of the District or a territory of the Unites States as well as obligations issued by DC Water, the Washington Metropolitan Area Transit Authority (WMATA), and the District of Columbia Housing Finance Agency (DCHFA) remain exempt.”

In conclusion, for DC residents with nationally diversified municipal bond portfolios, we encourage you to consult with your investment and/or tax adviser to assess the potential impact this may have and determine an appropriate strategy going forward.

Source: DC Office of Tax and Revenue


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