# Their tax bill drops 92%. They end up $14,652 poorer. By James Ustby, CFP®, APMA®. Published 2026-09-21. Canonical URL: https://jamesustby.com/articles/nest-egg-their-tax-bill-drops-92-they-end-up-14-652-poorer > We swapped the $1,600,000 ladder into municipal bonds and reran the week. The break-even municipal yield is 4.33%. The market is paying 3.33%. *This article first appeared in The Nest Egg, my daily email, on 2026-09-21. [Read the original issue](https://retirement-wealth.beehiiv.com/p/their-tax-bill-drops-92-they-end-up-14-652-poorer). It is educational, not a recommendation for you. The household in it is a hypothetical example, and market figures are as of the date shown and will have changed.* *Every figure below names its document. Every calculation is shown. Nothing here is a forecast.* Good morning. Friday finished split, with the S&P and the Nasdaq 100 higher and the Dow and the Russell lower, and the 10-year back at exactly 5%. Then the swap we promised on Friday. The result is not the one this strategy is usually sold on. ## In today's issue **The tape.** The Nasdaq 100 gained 0.67% and the S&P 0.17% while the Dow and the Russell 2000 gave back ground. The 10-year closed at 5.000%. Two minutes. **The swap.** Same $1,600,000, out of a taxable ladder paying 5.00% and into a national municipal ladder paying 3.33%. Four minutes. **$983.80.** That is the couple's entire federal income tax bill after the swap, down from $13,052. They are also $14,651.80 a year poorer. Three minutes. **One more thing.** Municipal interest is invisible to one test and fully visible to two others. Their two income figures end up $53,280 apart. One minute. ## The tape Closing levels and session changes, CNBC US markets, September 18, 2026. Gold and WTI crude are front-month futures settlements; their changes are measured against the September 17 settlements. ## The story All week the villain has been one number. $80,000 of fully taxable interest set their adjusted gross income, the adjusted gross income set every threshold, and the thresholds set the survivor's bill. On Friday the portfolio manager's line was that the lever with the most travel in it was the one nobody was pulling. Today we pull it. Municipal bond interest is excluded from gross income under section 103. It never reaches adjusted gross income, it never reaches taxable income, and it is not net investment income for the 3.8% surtax. On paper it deletes the problem. The price is yield. The iShares National Muni Bond ETF finished Friday with a trailing distribution yield of **3.33%**. Their ladder pays **5.00%**. Same $1,600,000, and the swap gives up **$26,720** a year in cash before a single tax is considered. $80,000 becomes $53,280. So the question is simple. Does the tax code hand back more than $26,720? Here is the answer in advance, and then the arithmetic behind it: it hands back **$12,068.20**. ## The position The same household, fifth day in a row. $1,600,000 in a bond ladder. $1,200,000 in a traditional IRA. Social Security of $44,000 on his record and $30,000 on hers. Both are 73, so required distributions have not started. As a couple their adjusted gross income is $142,900, their taxable income is $107,400, and their federal tax is $13,052. Nothing about the balance changes today. Only the character of the interest changes. ## The arithmetic **Step one. Social Security.** This is where the muni calculation is usually done wrong, in both directions. Tax-exempt interest is added back by name in the provisional income test under section 86(b)(2)(B), so munis are not invisible here. But $53,280 is smaller than $80,000, and the formula is sensitive to the difference. Taxable ladder: provisional income is $80,000 plus half of $74,000, or **$117,000**. That is far past the $44,000 joint threshold, so the benefit is capped at 85% taxable: **$62,900**. Municipal ladder: provisional income is $53,280 plus $37,000, or **$90,280**. Now the formula bites below the cap. 85% of ($90,280 minus $44,000) is $39,338, plus the $6,000 joint adjustment, for **$45,338**. Taxable Social Security falls $17,562 on a household whose Social Security did not change by one dollar. **Step two. The tax bill.** Adjusted gross income, taxable ladder: $80,000 plus $62,900 = **$142,900**. Adjusted gross income, municipal ladder: nothing plus $45,338 = **$45,338**. A cut of 68.3%. Taxable income: $107,400 becomes **$9,838** after the same $35,500 deduction. Federal income tax: $13,052.00 becomes **$983.80**, every dollar of it inside the 10% bracket. The bill falls **92.5%**. **Step three. The cash.** Taxable ladder: $80,000 + $74,000 − $13,052.00 = **$140,948.00** Municipal ladder: $53,280 + $74,000 − $983.80 = **$126,296.20** They are **$14,651.80** a year worse off. The code handed back $12,068.20 of the $26,720 the swap cost and kept the rest. **Step four. The survivor.** Her taxable ladder year, from Thursday: adjusted gross income $117,400, income tax $16,547.00, Medicare surcharge $1,148.40, total $17,695.40. Her municipal year: provisional income is $53,280 plus $22,000, or $75,280. Her benefit is still fully 85% taxed at $37,400, because the single formula caps there. Adjusted gross income $37,400. Taxable income $19,250. Income tax **$2,062.00**. And the surcharge disappears. Her Medicare income was $117,400, which was $8,400 past the single line. It is now $90,680, which is $18,320 below it. Her bill falls from $17,695.40 to $2,062.00, a cut of **88.4%**. Her cash goes from $106,304.60 to $95,218.00, still **$11,086.60** worse. **Step five. The break-even.** The useful output of all of this is not a verdict. It is a number you can shop against: what would the municipal ladder have to pay to leave them level? **4.33%** as a couple. That is $69,292.90 a year on the same $1,600,000. **4.02%** as a survivor. That is $64,366.60. The market is paying 3.33%. The gap is 100 basis points as a couple and 69 as a survivor. Note which way the survivor number moved. The case for municipals gets 31 basis points stronger the day one of them dies, because the single brackets and the single Medicare line punish taxable interest harder. It is still not strong enough. 2026 rates per Revenue Procedure 2025-32 and the 2026 CMS income-related monthly adjustment amounts. Municipal yield is the trailing distribution yield of the iShares National Muni Bond ETF at the close of September 18, 2026. No state tax modeled. Hypothetical illustration of published rates, built to show arithmetic. Not a projection of any reader's result and not a recommendation of any security. ## What the four of them would say **The portfolio manager.** 4.33% is not available in investment grade national municipals today, but it is not fantasy either. A longer ladder pays more than a fund's blended yield, and a single-state ladder in a high-tax state stacks a state exemption on top of the federal one. We modeled no state tax at all, which means this letter is the least favorable version of the municipal case, not the most. **The CPA.** The 92.5% is the figure that will get quoted and it is the least useful number in the letter. A tax bill is not an outcome. What lands in the account is the outcome. Anyone selling a strategy on the size of the tax cut rather than the size of the check is showing you the wrong number, and here the two point in opposite directions. **The financial planner.** Look at what the swap did to Friday's problem. Their taxable income went from $107,400, which was $6,600 past the top of the 12% bracket, to $9,838. They now have $90,962 of room under that bracket top where on Friday they had none at all. The swap did not only lower a bill. It built the conversion window that did not exist last week. **The estate attorney.** No part of a bond's tax character survives its owner. Municipal interest is tax-exempt; municipal bonds are not. Either ladder sits in the estate at fair market value, and the basis step-up under section 1014 treats them the same. This swap changes the income tax and nothing about the transfer. ## One more thing Municipal interest is invisible to exactly one test and fully visible to two others, and almost nobody is told the second half. **Invisible.** Gross income, under section 103. It never reaches adjusted gross income, never reaches taxable income, and is not net investment income for the 3.8% surtax. **Visible.** The Social Security provisional income test, section 86(b)(2)(B), which adds tax-exempt interest back by name. **Visible.** The Medicare surcharge, where the income figure is adjusted gross income plus tax-exempt interest, at 42 U.S.C. 1395r(i)(4). For this couple that gap is the whole lesson. Their adjusted gross income fell 68.3%, from $142,900 to $45,338. Their Medicare income fell 31.0%, from $142,900 to $98,618, because $53,280 of interest the IRS does not tax is added straight back in. Two income figures, same household, same year, **$53,280 apart**. One of them is what you owe. The other is what Medicare charges you for owing it. ## Tomorrow The planner's point deserves its own letter. The swap opened $90,962 of room under the 12% bracket, and Friday's conversion math said there was none. Tomorrow we convert into it and find out why the first $20,661 costs 20.75% while the $52,739 after it costs exactly 12.00%. ## Sources 2026 brackets, standard deduction and the additional deduction at 65 or older: [Revenue Procedure 2025-32](https://www.irs.gov/pub/irs-drop/rp-25-32.pdf). Exclusion of municipal interest from gross income: [26 U.S.C. 103](https://www.law.cornell.edu/uscode/text/26/103). Taxation of Social Security benefits and the add-back of tax-exempt interest: [26 U.S.C. 86](https://www.law.cornell.edu/uscode/text/26/86). The 3.8% surtax and the definition of net investment income: [26 U.S.C. 1411](https://www.law.cornell.edu/uscode/text/26/1411). The Medicare surcharge income definition: [42 U.S.C. 1395r(i)(4)](https://www.law.cornell.edu/uscode/text/42/1395r). 2026 Part B and Part D income-related monthly adjustment amounts: [Centers for Medicare & Medicaid Services](https://www.cms.gov/newsroom/fact-sheets/2026-medicare-parts-b-premiums-deductibles). Basis at death: [26 U.S.C. 1014](https://www.law.cornell.edu/uscode/text/26/1014). Municipal yield and market levels, close of September 18, 2026: [CNBC US markets](https://www.cnbc.com/markets/). The conversation a portfolio manager, a CPA, a financial planner and an estate attorney would have about your money if the four of them were ever in the same room. None of them ever talk to each other. This is that room, every weekday at 6:45am, sized to a portfolio between $500,000 and $5,000,000. The Nest Egg is educational material published by a registered representative. It is not tax, legal or investment advice, and it is not an offer or solicitation. Every case shown is a hypothetical illustration of published rates, built to demonstrate arithmetic, and is not a projection of any reader's result. State taxes, itemized deductions and the character of investment income are not modeled here and change the result. Nothing here is a recommendation of any security. Consult your own tax and legal advisors before acting. ## Sources - [The Nest Egg, original issue](https://retirement-wealth.beehiiv.com/p/their-tax-bill-drops-92-they-end-up-14-652-poorer) --- Author: James Ustby, CFP®, APMA®, Wealth Advisor, LPL Financial, Durham and Chapel Hill, North Carolina. This material is for general information only and is not intended to provide specific advice or recommendations for any individual. Examples are hypothetical and for illustration only. Securities and advisory services offered through LPL Financial, a registered investment advisor. Member FINRA / SIPC. Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP® and CERTIFIED FINANCIAL PLANNER® in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.