Category: Blog

Cash Flow Available for Debt Service (CFADS)

3 min read

Cash Flow Available for Debt Service (CFADS)When it comes to the risk of default, Moody’s found that during COVID-19, American businesses had a 7.8 percent chance of defaulting. This is compared to a low of 4 percent in 2021, but lower than the current 9.2 percent risk of default, according to a March 2025 report by the rating agency.

Also known as cash flow available for debt service, CFADS determines how much cash is available to service debt obligations. It looks at different cash inflows/outflows to show both internal (owners and managers) and external audiences (investors) how efficient (or not) a business is in its ability to produce cash flows and manage its debts without defaulting.

While one method businesses use is balancing client sales, it is also common to look at various accounting entries, including Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). The results of CFADS are often used by financial analysts when creating coverage ratios, including the project life coverage ratio (PLCR), the debt service coverage ratio (DSCR), and the loan life coverage ratio (LLCR). It can sometimes take the place of EBITDA in certain circumstances. It’s important to note that the three coverage ratios show how well a plan is able to service and not default on debt throughout the entire project’s period.

For example, the DSCR = CFADS / Scheduled Debt Service (Interest + Principal Obligations)

Once this is calculated based on the company’s project specifications, if the result is greater than 1, then it signifies and gives greater confidence to internal and external audiences that the company will be able to meet its milestones and final payments.

The most efficient formula for calculating CFADS is as follows:

EBITDA – Taxes – Positive or Negative Result of Working Capital – Capital Expenditures for Maintenance Only

$200,000 (EBITDA) – $30,000 (Taxes) + $20,000 (assuming there’s a negative $20,000 change in working capital) – $40,000 (assuming the capital expenditure investing in maintenance)

CFADS = $150,000

Sometimes the calculation includes dividends, which need to be factored into the calculation. This example assumes it is not part of the calculation.

Interpreting Results

It’s important to understand that a more detailed analysis helps all audiences determine if the projected cash flow is available for different claimants of the business. While most of the calculations are done via the waterfall model, it’s important to analyze it based upon senior and junior debt, along with equity. If a company declares bankruptcy, senior debt holders are the first priority to be made whole (or as whole as possible, depending on the circumstances). Senior debt is collateralized or secured with company assets that are sold off during bankruptcy. From there, junior debt holders are next in line, followed by convertible note holders, then preferred stockholders, and finally common stockholders.

While this calculation is only one part of the way internal and external stakeholders can measure a company’s financial health, with the chance of more firms defaulting on debt, it’s another tool in a financial analyst’s toolbox.

Rolling Back Regulations, Proving Citizenship Birth for Voting Rights, and Blocking Nationwide Injunctions

4 min read

Rolling Back Regulations, Proving Citizenship Birth for Voting Rights, and Blocking Nationwide InjunctionsProviding for congressional disapproval under chapter 8 of title 5, United States Code, of the rule submitted by the Department of Energy relating to “Energy Conservation Program: Energy Conservation Standards for Consumer Gas-Fired Instantaneous Water Heaters (HJ Res. 20) – The House and Senate both passed a resolution negating a previous rule mandating that tankless gas-fired water heaters meet certain criteria (less than 2 gallons capacity and greater than 50,000 Btu/hour) for efficiency standards, which would have phased out non-condensing technologies. Introduced by Rep. Gary Palmer (R-AL) on Jan. 15, the resolution is awaiting signature by the president.

A joint resolution disapproving the rule submitted by the Bureau of Consumer Financial Protection relating to “Overdraft Lending: Very Large Financial Institutions” (SJ Res 18) – This joint resolution, introduced by Sen. Tim Scott (R-SC) on Feb. 13, reverses a federal regulation governing overdraft fees charged by large banks. The previous rule limited overdraft fees to one of the following options: $5, cap the fee at an amount that covers costs and losses, or disclose the terms of their overdraft loan to give consumers choices for opening a line of overdraft credit, shopping for comparative loans, and determining a payment plan. The resolution passed in the Senate and the House on April 9 and presently awaits signature by the president.

SAVE Act (HR 22) – Introduced by Rep. Chip Roy (R-TX) on Jan. 3, this legislation passed in the House on April 10 and is currently under consideration in the Senate. This bill would amend the National Voter Registration Act of 1993 to require proof of United States citizenship to register to vote in elections for Federal office. The Safeguard American Voter Eligibility Act mandates that U.S. citizens present proof of citizenship in-person to election officials when registering to vote; making changes to their voter status (i.e., address change, party change); or the state election authority requests proof of citizenship when reviewing the integrity of current rolls. Voters must show both a valid ID and documentation that indicates the applicant was born in the United States, such as a passport or birth certificate. However, should the name on the ID and birth certificate not match, the applicant would also have to present legal documentation verifying the reason, such as a marriage certificate or other legal name change certification.

NORRA of 2025 (HR 1526) – Also referred to as the No Rogue Rulings Act of 2025, this legislation would restrict district court judges from issuing nationwide injunctive relief in cases only applicable to the district court. Cases involving two or more states would be referred to a three-judge panel, which would determine whether to issue a nationwide injunction. This bill was introduced by Rep. Daryll Issa (R-CA) on Feb. 24, passed in the House on April 9, and is under consideration in the Senate..

Clear Communication for Veterans Claims Act (HR 1039) – Introduced on Feb. 6 by Rep. Tom Barrett (R-MI), this bill would direct the Veterans Affairs (VA) to partner with an outside communications agency to make benefits communications more concise and easier for veterans to understand. The bill passed in the House on April 7 and is currently under consideration in the Senate.

Vietnam Veterans Liver Fluke Cancer Study Act (HR 586) – The purpose of this bipartisan bill is to authorize the VA to study and report on the prevalence of cholangiocarcinoma in veterans who served in the areas of conflict during the Vietnam War, including South Vietnam, North Vietnam and surrounding areas like Laos and Cambodia. The study would include identifying the rate of incidence of cholangiocarcinoma from the beginning of the Vietnam era to the date of enactment of this act. The bill was introduced by Rep. Nicolas LaLota (R-NY) on Jan. 21, passed in the House on April 7 and currently lies with the Senate.

Financial Implications of Marriage

4 min read

Financial Implications of MarriageMarriage isn’t just about two people who fall in love and choose to spend the rest of their lives together. It is also a contract. And while that contract might not be forever binding, marriage does come with certain financial and familial obligations regardless of whether the couple stays married or not.

That is why it is critical for couples to discuss their finances and goals early in the game. In fact, the best time to begin this conversation is actually before they begin making wedding plans. That’s because weddings can be very expensive. If the couple bears this expense, they will remove funds from their future plans and opportunities, which they should consider carefully before designing a wedding budget.

However, many times the parents of a couple will pay for the wedding. In this scenario, the newlyweds should consider how the cost of an expensive wedding would impact the paying party’s long-term financial situation. This is important because bankrupt parents could lead to a potential live-in caregiving situation once they are too old to take care of themselves. That’s quite a trade-off for a $100,000 wedding.

Takeaway: Regardless of who pays for the wedding, moderation is perhaps both prudent and considerate.

Partners also should share information about their earnings, assets, debts, and credit reports before getting married. They should discuss their career goals, preferences for children, type of housing, living location(s), and any big-ticket dreams, such as an expensive vacation or starting their own business. Together, the couple should consider each other’s goals and develop a plan to achieve those goals given their combined financial situation.

Takeaway: Note that while each spouse retains their own credit score and liability for debts prior to the marriage, joint debts acquired during the marriage are recorded on both credit reports.

Once married, couples often assume respective responsibilities, such as household earner and bill payer, while the other is a homemaker and primary child caregiver. From a financial perspective, this is not wise. It’s better for the marriage when each spouse takes turns managing finances, including paying bills, learning about investing and working with a financial advisor if they have one, being on all the joint accounts (home deed, insurance policies, etc.) and even each having their own retirement account (e.g., IRA, employer-sponsored retirement plan).

Takeaway: A collaborative approach to finances enables transparency so each spouse is aware of the other’s spending habits and bill-paying discipline.

The relationship tends to have more balance if each spouse has their own money, even if they do not work outside the home. If both spouses work, they could each have a checking account for their own personal expenses as well as a joint account used to pay for communal expenses like rent/mortgage, utilities, food, and upkeep.

Takeaway: A higher-earning spouse may contribute to a lower/no-earning spouse’s Roth IRA so that person has income to manage as they see fit.

Shared finances among married couples do offer certain benefits, such as lower costs for housing, health, long-term care, and auto insurance premiums. With particular regard to health insurance, consider if one spouse should join the other’s plan and how that might impact premiums, deductibles, and out-of-pocket expenses.

Takeaway: Find out if either spouses’ employer offers an incentive for declining coverage. This bonus income provides a good reason to join the other spouse’s plan.

Couples also have the option to compare the advantages of filing joint or separate tax returns, which may be impacted by one partner’s medical expenses or student loan debt. Also, be aware that no matter what time of year you have your wedding, as long as you are married as of Dec. 31, the IRS considers you married for the whole year for tax-filing purposes.

Takeaway: If one spouse is on an income-based student loan debt repayment plan, be aware that filing jointly with two incomes may result in higher payments than if they file separately.

Right after the wedding, there are several actions most couples should take. For example, report any name changes to the Social Security Administration; update any address changes with the Postal Service, employers, and the IRS; and supply your employers with a new W-4 withholding form.

Takeaway: If you’re taking an extended honeymoon, you might want to complete some of these tasks before your wedding day.

How New Grads Can Master Their Finances

4 min read

How New Grads Can Master Their FinancesCollege graduation is a huge milestone. You’ve completed one chapter and are on the precipice of the next. While exciting, it can also be daunting – you have a whole new set of responsibilities in front of you. But take heart, we have some tips to help you navigate.

  1. Look back to look forward. Take some time to examine your money habits. Do you have a tendency to overspend? Reward yourself with dinners out or a little retail therapy after a stressful event? Neither of these things is good or bad. They’re just choices. However, if you intentionally monitor your behavior and make necessary changes, you’ll learn how to budget early in your life. This way, you’ll set yourself up for success in the future. The truth is, a little self-awareness can go a long way.
  2. Create a budget and stick to it. Don’t think of this as limiting. It’s simply a way to get a hold of your money and learn to live within your means. One smart way to begin is using the 50/30/20 rule: You allocate 50 percent of your earnings to your basic needs, 30 percent to your wants, and 20 percent to your savings. You can also set up short-term and long-term goals. Do you want to save for a vacation? New furniture? A new car? No matter what, start by listing ALL your expenses and then breaking them out into categories. See what you’re spending and make adjustments. To get started, here’s a free budgeting calculator.
  3. Start saving. Right now, you might be feeling immortal. You’re young and just beginning your life. But someday, you’ll be older and need resources to live. So instead of thinking of this as taking away from your fun, think of it as paying yourself first, your future self. Whether for a getaway, an emergency, or whatever, regularly set aside some cash. But there’s more. Take advantage of savings accounts that will help you save on taxes, such as an individual retirement account (IRA) or a 401(K). Many employers offer these and even match your contributions, so don’t miss out. You want your money to work hard for you.
  4. Pay back your student loans. It might be very tempting just to kick this to the curb. Warning: Don’t do it! Even if you have a six-month grace period. Find out what kind of loan you have: Federal or private? Subsidized or unsubsidized? If you can’t afford to pay large chunks, contact your lender and work out a plan. Another important thing is to find out whether you can deduct a portion of your student loan interest payments on your taxes. And finally, you can even investigate consolidating, refinancing, or whether you qualify for loan deferment. Just handle it. You’ll be so glad you did.
  5. Know your worth when job hunting. Do research and find out the salary range for your level in your chosen industry. You should also examine companies. What are the benefits? If the perks are exceptional, it might be worth taking a slightly lower-paying job, depending on your situation. If you can’t negotiate your salary, ask to see if they have other perks, like helping with student loans. Another exercise is to create budgets around net salaries to get a sense of what managing your money looks like.
  6. Vet your health insurance. Some of you might be covered on your parents’ policy until age 26. Or you might be covered by your employer. If you have insurance through your job and are in good health, a plan with a higher deductible may be a smart move. You’ll save on monthly payments and have more cash for after work.          

When it comes to handling your money, all it takes is a little practice. And baby steps. Sure, you’re going to make mistakes. But jump in. Learn the ins and outs. In the end, it’s going to determine whether you remain a student or become a responsible adult.

Sources

https://www.investopedia.com/top-7-finance-tips-for-new-grads-5248426 

 

Building Deeper Customer Connections: Leveraging Web3 for Loyalty, Community, and Engagement

4 min read

Web3 for Loyalty, Community, and EngagementCompetition in business today has become fierce. Each organization is constantly looking for innovative ways to form strong relationships with its customers. Loyalty programs have been used for a long time to build a devoted customer base. As technology advances, new technologies like Web3 are emerging, offering more opportunities to revolutionize loyalty programs, build vibrant communities, and deepen customer engagement.

Transforming loyalty programs through Web3

Loyalty programs help boost customer spending and drive long-term business success. Loyalty program members also generate more revenue than non-members. In the United States alone, the average consumer belonged to more than 15 programs in 2024. However, traditional loyalty programs have encountered problems that include customer disengagement and unclaimed rewards.

Web3-based loyalty programs address these problems by leveraging blockchain technology to create a more engaging, transparent, and valuable experience for customers. With the global Web3 market having a valuation of $4.62 billion by January 2025, there is enormous potential for businesses to innovate in this space. Web3 is the next iteration of the internet, which will help businesses create deeper customer connections through decentralized technologies like blockchain, non-fungible tokens (NFTs), and decentralized autonomous organizations (DAOs).

Why Web3 Loyalty Programs

  1. Enhanced personalization and security
    Web3 loyalty programs provide enhanced customer engagement through hyper-personalization. Businesses can utilize blockchain technology to analyze customer preferences, behaviors, and interactions to customize rewards. This makes every customer feel valued. Using this approach, it becomes easy to focus on those customers who drive the majority of engagement and revenue. The decentralized nature of blockchain also ensures that data remains encrypted, secure, and only accessible with explicit consent.
  2. True ownership of rewards
    In traditional programs, loyalty points exist only within a company’s database. However, Web3 platforms create unique tokens that a customer can own and control. When customers have this kind of authentic ownership, it changes how they perceive and engage with loyalty programs that allow greater flexibility in how they use their rewards.
  3. Interoperability and expanded value
    Traditional loyalty programs, in most cases, limit rewards to a single brand or ecosystem. On the other hand, Web3 loyalty tokens function as universal currencies. This enables global redemption networks — permissionless collaboration through smart contracts and cross-sector partnerships.
  4. NTF-based loyalty rewards
    Instead of receiving generic points, a customer is issued an NFT token. The uniqueness of NFTs adds a layer of desirability and collectability, making the loyalty program more engaging and valuable. The NFTs can be potentially traded or sold on secondary marketplaces, adding more value to customers who can turn their loyalty tokens into liquid assets.
  5. Community driven engagement
    Web3 loyalty programs offer a community-centered approach through shared goals, collective rewards, and member governance through DAOs. By encouraging peer interaction it creates a sense of belonging, shifting focus from individual transactions to collective engagement.
  6. Transparency and trust
    Blockchain infrastructure provides immutable transaction records and enhanced security. Real-time reward tracking is also possible through blockchain technology. This addresses consumer concerns about traditional programs’ security risks. It also builds trust and encourages more engagement.
  7. Reduced unused rewards
    Web3 programs can implement “tokenomics” to prevent the devaluation of rewards and encourage active participation.

Navigating the Web3 landscape

While there is immense potential to build deeper customer connections with Web3, there are some considerations to help businesses approach this landscape strategically.

  • Understand your customers
    Before adopting the Web3 loyalty programs, a business must understand its customers. It is important to find out if they are receptive to these technologies, as well as their digital habits and preferences.
  • Start small
    Beginning with a pilot project and gradually integrating Web3 elements allows for learning and proper adaptation.
  • Focus on value creation
    The key to success when adopting any new technology is providing genuine value to customers. The technology should enhance the customer experience.
  • Educate customers
    Educate customers about the new adoption and provide clear guidance on how to interact with the technology.
  • Stay informed
    The Web3 landscape is rapidly evolving; therefore, it is crucial to stay informed on the latest trends and best practices.

Conclusion

Web3 presents a unique opportunity for businesses to revolutionize loyalty programs through blockchain, NFTs, and decentralized engagement. The ability to prioritize personalization, security, and true ownership will help businesses develop deeper customer connections. Although Web3 might seem complex, the potential benefits for businesses that embrace this evolving technology are significant.

Dissecting the Half-Year Convention for Depreciation

3 min read

Half-Year Convention for DepreciationDepreciation can help a business realize tax benefits, maintain compliance with financial reporting requirements, and project asset replacement. The half-year convention for depreciation is an important practice to understand.

For fixed assets, depreciation is recognized and recorded on a 50 percent basis for the initial and concluding years over its schedule. This supposes that fixed assets have been in service for 50 percent of their initial calendar service year upon acquisition. It’s normally implemented by taxation agencies to limit the upper limits for depreciation attestations to 50 percent of the yearly figures.

The balance of the annual 50 percent depreciation amount is recognized/recorded during the depreciation schedule’s last year, as the fixed asset will be removed from service mid-year. Regardless of the type of depreciation – straight-line, double-declining, etc. – the half-year convention applies equally.

This has been instituted because businesses were tempted to buy fixed assets in the third or fourth quarter of a fiscal year and try to deduct it fully via complete depreciation deduction. However, this convention is explicit in that fixed assets in service on or after July 1 may only deduct half of otherwise normal depreciation schedules.

How It Works

In this example, Production Equipment is purchased for $50,000 on April 1, 2022, with a useful life of 7 years. Using the half-year convention, depreciation is as follows:

Straight-line Depreciations = Cost of Asset / Useful Life = $50,000 / 7 = $7,142.86

Half-Year Convention: $7,142.86 / 2 = $3,571.43

This also assumes that there’s no scrap of salvage value. Although there are 7 years for the item’s useful life, with the half-year convention, it’s treated as 8 years for the depreciation schedule:

Year 1: $3,571.43

Year 2: $7,142.86

Year 3: $7,142.86

Year 4: $7,142.86

Year 5: $7,142.86

Year 6: $7,142.86

Year 7: $7,142.86

Year 8: $3,571.43

Context for Depreciation Convention

A depreciation convention gives context on how depreciation is performed by the company. It guides the company on available depreciation methods based on the asset’s useful life, how much the asset can be depreciated once it’s removed from service, and how depreciation is accounted/claimed in the initial and final year during the asset’s recovery period.

Depending on the situation and the type of depreciation convention involved, the following are some different conventions and how they vary:

  • Full Month permits a business to get a complete month of depreciation for the month when the asset has been put in service. There’s no depreciation taken for the month of disposal.
  • Next Month permits a business to start recording depreciation for the fixed assets the following month and being able to record one month of depreciation “when disposed of.”
  • Actual Days permits depreciation to be recorded for every single day an asset is in service during its fiscal year.
  • Mid-Quarter permits depreciation for half of the 3-month business period whenever the asset’s been put in place and disposed of (for both quarters).

Conclusion

While this is illustrative of financial reporting requirements, it’s an important consideration for business owners and their accounting professionals. Optimizing fixed asset depreciation leads to more accurate books, which will help in tax planning.

Valuation Ratio Calculating the EV / 2P

3 min read

Valuation Ratio Calculating the EV / 2PWhen it comes to analyzing a company’s financials, there are many avenues we can take. One way is through multiples; calculating the EV/2P multiple is the focus of this analysis.

This ratio looks at a business’ enterprise value against its proven and probable 2P reserves. While ratios or multiples are used in valuing companies, this metric is used chiefly to value gas and oil companies for energy sector analysts. Analysts use this calculation to determine the likelihood that a company’s reserve resources can underpin its functioning and expansion efforts. Along with the ratio, analysts use micro and macro factors to determine a company’s financial health, its growth prospects, and whether the business is undervalued or overvalued.

This multiple is similar in comparison to other valuation multiples such as Price-to-Book (P/B), Price-to-Earnings (PE), Enterprise Value/Earnings Before Interest, Taxes, Depreciation, and Amortization. While these other metrics can also value an oil or gas company, understanding how it’s calculated is essential to why it is sector specific.  

Breaking Down the EV/2P Ratio

EV = Market Value of Equity + Market Value of Debt – Cash and Cash Equivalents

It’s determined by the complete market worth asserted by the bond and equity holders (net of cash).

2P = Proven Reserves + Probable Reserves

The reserves of a company give analysts and investors an idea of the likelihood of the recoverability of reserves being produced and assisting the company’s growth. Proven reserves, often denoted as “P1” or “P90,” are rated at a 90 percent chance of recovering successfully. Probable reserves, also called “P50,” have a 1-in-2 chance of recovering. Both reserve types and their likelihood of being recovered are, therefore, referred to as 2P.  

It’s important to note a third category referred to as “possible reserves.” This category is not factored into the company’s valuation because the 10 percent to 50 percent likelihood of reserve recoverability is too low.  

Example

Illustrating how it’s calculated gives a more complete picture of how to analyze the results. For example, say a business‘ market capitalization is $200 million with a net debt of $100 million, giving it an enterprise value of $300 million. Assuming the company has $10 million of probable reserves, $20 million of proven reserves, and $15 million of possible reserves, the calculation is as follows:

EV = $300 million ($200 million + $100 million)

2P reserves = $30 million ($10 million + $20 million)

Therefore, $300 million/$30 million = $10

Every dollar of its market capitalization is worth $10 based on its 2P reserves. Once the calculation is determined, the ratio of the EV/2P is measured against the energy sector’s average ratio. The higher the EV/2P ratio, especially against its peers, the higher valuation the company has compared to other companies with the same amount of 2P reserves. The company’s shares are sold at a higher multiple than other companies.

It’s important to keep in mind that if a company’s financials are stronger or it’s more efficient and provides a better prospect for investors against its peers, its lofty valuation may be justified. It’s also important to not look at valuing companies exclusively with this ratio/multiple but also review other metrics and the macro-economic conditions before making a final investment decision.

While this multiple is primarily used for the energy industry, those who use it should be mindful to not analyze a company in that lens only, but to use a holistic analysis when valuing any type of company.

Preventing a Government Shut Down, Rolling Back Regulations and Clarifying Cryptocurrency Protocols

3 min read

Preventing a Government Shut Down, Rolling Back Regulations and Clarifying Cryptocurrency ProtocolsFull-Year Continuing Appropriations and Extensions Act, 2025 (HR 1968) – In the nick of time before the midnight deadline that would have otherwise shut down the Federal government, Congress passed a budget bill to fund the rest of the fiscal year that ends Sept. 30. This bill increases funding for the military by $6 billion while reducing non-defense spending by $13 million. The federal funding bill also reduced the amount of funding for the District of Columbia (Washington D.C.) by $1.1 billion, which is paid for by local taxes. This final continuing resolution bill was passed in the House on March 11, in the Senate on March 14, and signed by the president on March 15.

District of Columbia Local Funds Act, 2025 (S 1077) – Just four hours after passing the CR budget bill, Senators passed this new bill to restore Washington funding back to 2024 levels. The reduction of more than $1 billion in funding threatens to impact police, fire, and other services in the city where much of Congress resides. The bill was introduced by Susan Collins (R-ME) and passed on March 14. It is currently under consideration in the House.

Bureau of Ocean Energy Management rule relating to “Protection of Marine Archaeological Resources” (SJ Res 11) – This resolution rolls back a rule imposed during the last administration by the Bureau of Ocean Energy Management. The revoked rule previously required oil and gas companies to identify and submit a report of potential archaeological resources on the Outer Continental Shelf seafloor that could be affected by development. The joint resolution was introduced by Sen. John Kennedy on Feb. 4. It passed in the Senate on Feb. 26 and in the House on March 6. The bill was signed by the president on March 14.

Protect Small Businesses from Excessive Paperwork Act of 2025 (HR 736) – Introduced by Rep. Zach Nunn (R-IA) on Jan. 24, this legislation passed in the House on Feb. 10 and is currently under consideration in the Senate. The purpose of the bill is to extend the filing deadline to the end of the year for businesses to report beneficial ownership information (BOI). This would give the Department of Treasury time to reconsider rules implemented during the Biden administration in order to make sure small businesses are not burdened by excessive and complex regulations. 

GENIUS Act of 2025 (S 919) – This bipartisan bill was introduced by Sen. Bill Hagerty (R-TN) on March 10. It would establish licensing and regulatory requirements for stablecoins, which are cryptocurrency tokens used in the crypto economy and traditional financial markets. Among its provisions, the bill would enable states to regulate stablecoin issuers with a market capitalization of under $10 billion, while larger issuers would be regulated at the federal level. This bipartisan legislation is currently in the early stages of committee reporting.

 

Reasons to Consider Out-of-State Municipal Bonds

4 min read

Out-of-State Municipal BondsMunicipal bonds (also known as munis) are issued by a state or local government. Interest income is typically paid out twice a year and is not subject to federal taxes. When an investor purchases a bond issued from his own state, the income is generally not subject to state income taxes.

However, there are a few good reasons to consider buying out-of-state municipal bonds. The first reason is to consider bond quality. Each muni bond is given a quality rating based on the municipality’s ability to make the regular interest payments to investors and return their principal when the term matures. To make this determination, agencies like Moody’s and S&P evaluate the issuer’s debt structure, financial stability and long-term economic prospects.

Credit Quality

The highest Moody’s rating is Aaa (the lowest is C); a rating of Baa3 or higher is considered investment grade. The highest S&P rating is AAA (the lowest is D), and a rating of BBB or higher is considered investment grade. While it’s a good idea to invest in highly rated bonds, note that their yields are inversely related to their quality. In other words, the lower the rating, the higher the interest income. Just be sure to consider that with that higher yield comes a higher risk of the bond issuer defaulting. In today’s economic landscape, an average credit rating of AA/Aa is considered a good balance of risk and bond yield.

Diversification

Second, if the investor holds a portfolio of municipal bonds, owning some from other states can help diversify his bond portfolio. If the investor’s home state has lower-rated bonds, investing in higher-rated bonds from other states can lower his bond portfolio’s quality risk. On the other hand, if the investor’s home state has highly rated bonds, purchasing bonds from states with lower-rated bonds can increase the amount of income his portfolio pays out. Remember, too, that it’s important to consider both the bond yield (also known as its coupon rate) and its issuing state’s taxes in order to come out ahead.

More Choices

Note that both California and New York are high-tax states, so it’s particularly important to consider the tax situation before buying there. With that said, there are also good reasons to buy bonds in these two states because they offer a range of quality municipal bonds. On the flip side, some states have fewer bond options to choose from and a lower risk profile, leaving resident investors with few options regardless of the state tax benefit. Be aware that the majority of muni bonds are rated lower than AA in Illinois, Pennsylvania, and New Jersey.

Tax Considerations

There are seven states that do not impose state income taxes: Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming. New Hampshire recently phased out its tax on investment and interest income. If a muni bond investor lives in a state with no taxes on income, there is no benefit to limiting his purchases to in-state bonds. In this scenario, it’s a good idea to compare muni bonds from states with high-rated and high-yield bonds to build a diversified bond portfolio while also considering the annual tax bill in each of those states.

If a muni bond investor lives in a high-tax state, such as California with a 12.3 percent tax rate for residents with income in the top bracket (effectively 13.3 percent if you include the additional 1 percent surcharge on individuals earning over $1 million), then it makes sense to buy out-of-state munis to help reduce their tax burden.

Despite these general guidelines, investors should check on the muni bond tax status in their home state before making a purchase. Some states, such as Illinois, require residents to pay taxes on in-state muni bond yields. In this situation, the resident may find better deals with out-of-state munis by comparing coupon rates against the income taxes in those states.

As Tax Season Opens, We Must Stay Alert to Rising Scam Threats

3 min read

IRS Scam Threats, IRS IRS Scams As tax filing season begins, scammers are ramping up efforts to steal taxpayers’ personal information through increasingly sophisticated schemes. Below, we discuss the latest scam, what to look out for in general, and what to do if you suspect something malicious.

New Scam of the Season

The U.S. Treasury Inspector General for Tax Administration (TIGTA) recently issued an alert about a prevalent scam involving Economic Impact Payments.

In this scheme, taxpayers receive texts claiming they’re eligible for a $1,400 Economic Impact Payment, requesting personal information and bank details for deposit. While the IRS is indeed processing some legitimate Recovery Rebate Credit payments from 2021 tax returns, they will never request personal information via text or social media. These legitimate payments will be automatically distributed by late January 2025, either through direct deposit or paper check, with official notification letters sent separately.

Detecting Scam in General

The cybersecurity firm Guardio reports a 77 percent increase in IRS-related spam messages, highlighting how scammers exploit taxpayers’ fears of making mistakes on their returns. Common manipulation tactics include urgent messages claiming:

  • Tax return errors requiring immediate action to avoid penalties
  • Unexpected tax refund eligibility requiring verification
  • Account flags demanding immediate information verification to prevent legal action

These fraudulent messages typically contain malicious links designed to steal sensitive information like Social Security numbers, banking details, and payment credentials. They often masquerade as official IRS forms or legitimate tax advisory companies.

Key Warning Signs of Tax Scams:

  • Requests for sensitive personal or financial information
  • Links to suspicious websites (legitimate government sites end in .gov)
  • Misspellings, grammatical errors, or inconsistent formatting
  • Fuzzy or distorted official logos
  • Initial contact via email, phone, text, or social media instead of postal mail

What to Do if You Receive a Suspicious Message

If you receive a suspicious message, don’t engage with it. Never click links or provide personal information to unknown sources. Report potential fraud by forwarding the message to phishing@irs.gov or filing a report with TIGTA. If you’re uncertain about correspondence claiming to be from the IRS, verify it by calling 800-829-1040 or visiting IRS.gov. Your online IRS account will display any official notices mailed to you.

If you’ve accidentally engaged with a scam:

  1. Immediately close any suspicious website tabs
  2. Change passwords for potentially compromised accounts
  3. Contact your bank or credit card provider to monitor for fraudulent activity
  4. Report the incident to the IRS and file an identity theft report with the Federal Trade Commission
  5. Consider notifying local law enforcement

When searching for tax-related information online, only use official sources like IRS.gov or the official IRS app. Be wary of sponsored ads and search results that might lead to fraudulent websites. Consider bookmarking official sites for quick, secure access.

Conclusion

Remember, the IRS will never initiate contact through email, text, or social media. When in doubt, assume it’s a scam and verify through official channels. Keeping your personal information secure requires constant vigilance, especially during tax season when scammers are most active.