Time to Look for Tax Free Investments

The fact is that a large number of Americans do not have health insurance. The fact is that fixing this will increase the budget deficit unless taxes are raised, for the middle class as well as the “rich” with incomes of over $250,000 a year. The economy is slowly recovering and the stimulus money helped. However, someone has to pay the bill eventually so taxes will have to go up. For the long term investor it may well be the time to start looking for tax free investments.

A favorite tax free investment is in municipal bonds. Municipal bonds are used by state or local government to build bridges, roads, or other public projects. Because the federal government does not tax these, they are a tax free investment and protected from the expected tax increases needed to cover the budget deficit.

You can buy individual bonds, typically in $1,000 increments or you can invest in bond funds. If you choose municipal bonds in your state of residence the bonds are usually a tax free investment at the state level too. Thus investing in individual bonds may provide more tax free investment advantage than a bond fund. The advantage of a bond fund is that you can invest any amount of money, not in increments of $1,000 or more.

A lot of stimulus money is going into infrastructure in the USA. The federal government can issue treasury notes to raise money, or print money. Municipalities need to issue bonds.

The rap against bonds has always been the relatively low yield. This complaint is made when the market is going up. This complaint goes away when the market collapses. Typically those in high income brackets have looked for tax free investments such as tax free bonds as the secure end of a basket of investments. Obviously those in higher income brackets benefit more from a tax free investment. As the specter of everyone paying higher taxes approaches more folks should be looking for tax free investments.

As the health insurance (or lack of it) issue becomes more pressing there will eventually be some sort of government health insurance guarantee or nationalization of health care. There will be more government offices, employees, and expense, not to mention health care delivered that is not being delivered today when so many people lack health insurance and the cash to cover medical expenses.

Besides the health insurance issue the huge amount of money that has been needed to stimulate the economy and avoid a depression will need to be paid back and when the economy is more stable we will likely see the argument being made that the patriotic thing to do is pay more taxes to help bring down the dangerous budget deficit. As usual the issue will likely be addressed obliquely because the American electorate does not like to hear Pogo’s famous proclamation that “We have met the enemy and he is us.” Whether the USA comes to grips with its economic slide or needs to be fooled into compliance they will be paying higher taxes. Those with the foresight will be looking now for tax free investments.

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