Tax Law

Caplin & Drysdale: District of Columbia Alters Treatment of Municipal Bond Interest

By Beth Kaufman, Lucy Lee and Michael Pfeifer

Effective January 1, 2012, the District of Columbia will no longer exempt the income on municipal bonds issued by all municipalities. Income from the following bonds will continue to be tax exempt for D.C. tax purposes:

  • Bonds issued by the District of Columbia or the Metropolitan Washington Regional Airport Authority
  • Bonds issued by possessions of the United States (Puerto Rico, Guam, Virgin Islands, and American Samoa)
  • Bonds of other municipalities that were acquired by the taxpayer before January 1, 2012

Similar rules will apply for bonds owned by D.C. residents through mutual funds. Specifically, income from bonds purchased by the fund after December 31, 2011, that are not bonds issued by the District of Columbia or the Metropolitan Regional Airport Authority, will be subject to D.C. income tax. Income from bonds issued by other municipalities that were purchased by the fund prior to January 1, 2012, will continue to be exempt from D.C. income tax, provided that that fund provides the taxpayer with substantiation of the amount of that income. If the fund fails to provide that information, only the income from bonds of the District of Columbia and the Metropolitan Regional Airport authority will be tax exempt.  

If you have any questions about this alert, please contact:

Beth Kaufman at 202.862.5062 or
Lucy Lee at 202.862.8863 or
Michael Pfeifer at 202.862.5085 or 

Caplin & Drysdale   
Washington, D.C. Office: One Thomas Circle N.W., Suite 1100
Washington, D.C., USA 20005
PH: +1 202-862-5000 FX: +1 202-429-3301 

New York Office: 375 Park Avenue, 35th Floor
New York, New York, USA 10152
PH: +1 212-319-7125 FX: +1 212-644-6755 

© 2011 Caplin & Drysdale, Chartered

All Rights Reserved. 

Caplin & Drysdale provides a full range of tax and legal services to companies, organizations, and individuals throughout the United States and around the world. The firm also offers private client counseling, exempt organizations counseling, employee benefits counseling, corporate law counseling, political activity law counseling, white collar defense, and complex civil litigation services. 

This announcement does not provide legal advice, nor does it create an attorney-client relationship with you or any other reader. If you require legal guidance in any specific situation, you should engage a qualified lawyer for that purpose. Prior results do not guarantee a similar outcome.


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