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Ekberg: Hi, my name is Devin Ekberg. I'm part of the Advisor Education Group here at PIMCO.
Text on screen: Devin Ekberg, Senior Consultant, Advisor Education
There've been a lot of changes in our tax code for the last five to 10 years, and one of the biggest changes that we saw was in the One Big Beautiful Bill Act that was passed in the middle of 2025.
So that ripples through a lot of planning conversations that financial advisors are having with their clients, high net worth clients, business owners, affluent clients. These are all conversations that need to and can happen, and we can add a lot of value by educating our clients on some of these tax changes in the provisions that specifically address them.
FULL PAGE GRAPHIC – Title: Optimize after-tax returns for bonds
This chart compares tax‑exempt municipal bond yields with their taxable equivalent yields across different married-filing-jointly (MFJ) income levels and marginal tax brackets. As income and tax rates increase, the taxable equivalent yield rises, showing that higher income investors gain more after‑tax benefit from tax‑exempt bonds, while lower‑income investors may receive better returns from taxable bonds. The table helps investors quickly evaluate which type of bond provides the better after‑tax return based on their income and tax situation.
Now, I would agree with the textbook that your higher income earners, specifically in the highest marginal tax rates, benefit the most from tax exempt bonds, that's kind of how tax equivalent yields work.
But I'm gonna show you in a second with a recommendation, some of the considerations with bonds in 2026 specifically that may actually benefit taxpayers even in lower marginal tax brackets. So first of all, the first thing you might consider is that there, in this particular asset class in municipal bonds, there is a real difference between active management and passive management.
Municipal bonds as an asset class is a little bit of a funny class compared to other types of classes. There's a lot of inefficiencies and dislocations, last year in particular, in 2025, there was a lot of structural issues, a lot of supply that met the market, and it caused a lot of disruption in price and so forth. Unfortunately, passive managers that's a very difficult environment for passive bond managers to handle.
And it creates opportunities for active bond managers to step in and potentially add some value. And indeed, we saw that last year, and as we work through some of those dislocations in 2026, there may be some opportunities for tax alpha there. So you may look at your client's portfolios who have passive muni exposure and consider, and especially if there are losses in that portion of the portfolio, recognizing those losses, taking the opportunity to use the proceeds to consider active managers.
FULL PAGE GRAPHIC – Title: Tax-exempt bond considerations for 2026
This image outlines key considerations for investing in tax‑exempt (municipal) bonds in 2026. It highlights potential benefits, including capturing value through active management, harvesting losses, converting cash to tax‑exempt income, and taking advantage of tax deductions (including SALT, QBI, and senior deductions). It also notes that today’s yield environment can make muni bonds attractive even for taxpayers with marginal rates around 17% And summarizes the tradeoffs, including possible increases in Medicare IRMAA surcharges, higher taxable Social Security income, and greater exposure to the AMT for some investors.
The second way that you add value there is that you're reducing taxable income for your client. And recent yield advantages, again, comparing asset classes, suggest that benefits that could benefit taxpayers with a marginal rate, not just in the highest marginal tax bracket, but with that yield advantage, actually in lower tax brackets, like 35%, 32%, and maybe even lower, that doesn't happen very often.
And so again, reducing taxable income in that manner can be a big advantage. And then finally, on top of that, you may also be helping preserve valuable tax deductions for certain taxpayers. things like the bonus senior deduction for your clients that are age 65 and older, if they're married filing jointly, it's an additional $12,000 bonus deduction that they can take, we help preserve that with their income.
Famously, the higher state and local tax deduction, the cap was raised to $40,000 as a tax deduction, but is phased out at certain income levels. So we wanna make sure that we use muni bond income to preserve that tax deduction, or the199A QBI business deduction as well. So great considerations to add value in 2026.
Now, there are certainly some trade-offs there too. Municipal bond income is not included in marginal modified adjusted gross income for the purposes of deductions, but it is added back into other calculations, if your clients are Medicare recipients, it may raise their IRMAA surcharges or it might increase sensitivity for certain taxpayers for AMT as well.
So it comes down to a math problem that we may, you know, engage with a CPA to be sure that we are maximizing those types of benefits.
Text on screen: Visit pimco.com/advisoreducation or contact local PIMCO Account Manager
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Disclosure
All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Income from municipal bonds is exempt from federal income tax and may be subject to state and local taxes and at times the alternative minimum tax.
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