Sure, everyone knows about billionaires moving to Florida for the warm weather and lower taxes, but there’s another, less-ballyhooed advantage for Sunshine State residents: better muni yields.
The Wall Street Journal recently chronicled the moves of some affluent, well-known investors. As expected, the article cited tax savings and pleasant climate as their chief motivations for relocating from the northeast to Florida.
SALT cap a thorn
The tax overhaul, passed two years ago, is a particular thorn for residents of high-tax areas. Though the law lowered the top federal income tax rate to 37% from 39.6%, it also capped the deductibility of state and local taxes at $10,000. For residents of New York City, for example, where state and local income taxes can approach 13%, the costs can be substantial.
In addition to paying less taxes, however, there’s another significant bonus in moving to a state with no income tax.
Interest from municipal bonds is usually free of federal, state and local taxes. So for investors living in states that impose an income tax, it makes sense for them to buy municipal bonds issued in their home state and maximize the tax-free feature of munis.
But for those who live in states that don’t impose an income tax – like Florida – bonds issued elsewhere are equally attractive, enabling them to select from a much bigger pool of issues.
Naturally, the reverse is true. Residents of higher-tax states, like New York, compete with other New Yorkers for bonds issued in their state. And more competition drives up the price, even on lower-quality bonds.
That means transplants don’t just enjoy more sunshine when they move to Florida. They take advantage of higher income and better yields.
Florida residents enjoy better muni yields, but options for others, too
Of course, it’s not all doom-and-gloom for residents in states saddled with higher taxes. As we have pointed out (“Finding Bonds When the Muni Supply is Tight”), it can make sense for investors to consider bonds from outside their state, regardless of where they live. Even if they’re required to pay the extra taxes, the net effect can often be higher yields. Also, supply is growing in certain sectors of the bond market, giving them more options.
For newcomers to the Sunshine State, they will discover what current residents already know: The pool of bonds to choose from is bigger with the potential for better muni yields. But for everyone, the fundamentals remain the same.
Look for quality, then yield. There are tens of thousands of issuers and plenty of munis to suit the unique needs of all investors. For Florida residents, though, there is an additional ray of sunshine.