.floatimg-left-hort { float:left; } .floatimg-left-caption-hort { float:left; margin-bottom:10px; width:300px; margin-right:10px; clear:left;} .floatimg-left-vert { float:left; margin-top:10px; margin-right:15px; width:200px;} .floatimg-left-caption-vert { float:left; margin-right:10px; margin-bottom:10px; font-size: 12px; width:200px;} .floatimg-right-hort { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 300px;} .floatimg-right-caption-hort { float:left; margin-right:10px; margin-bottom:10px; width: 300px; font-size: 12px; } .floatimg-right-vert { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 200px;} .floatimg-right-caption-vert { float:left; margin-right:10px; margin-bottom:10px; width: 200px; font-size: 12px; } .floatimgright-sidebar { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 200px; border-top-style: double; border-top-color: black; border-bottom-style: double; border-bottom-color: black;} .floatimgright-sidebar p { line-height: 115%; text-indent: 10px; } .floatimgright-sidebar h4 { font-variant:small-caps; } .pullquote { float:right; margin-top:10px; margin-left:10px; margin-bottom:10px; width: 150px; background: url(http://www.dmbusinessdaily.com/DAILY/editorial/extras/closequote.gif) no-repeat bottom right !important ; line-height: 150%; font-size: 125%; border-top: 1px solid; border-bottom: 1px solid;} .floatvidleft { float:left; margin-bottom:10px; width:325px; margin-right:10px; clear:left;} .floatvidright { float:right; margin-bottom:10px; width:325px; margin-right:10px; clear:left;} Dear Mr. Berko:

Dear M.R.:

I don’t know much about municipal bonds, either, but as a collector of scripophily, I own one of the first municipal bonds issued in the United States, issued by the county of Lycoming, Pa., in 1894. It’s a beautiful certificate.

Now I’m going to give you an absolutely irrevocable guarantee that in the next 18 months, today’s niggardly short-term rates could at least triple, and long-term rates may increase by at least 1.5 percentage points. And, oh yes, future tax rates on dividend and capital gains will knock you for six, a loop and out.

Though rates on corporate bonds and certificates of deposit will increase, it’s believed that municipal bond rates, which are currently higher than Treasuries, will remain within 25 to 50 basis points of where they are today. There will be less pressure on municipal bond rates because the Build America Bond program has been hugely successful, reducing the issuance of new munis, while higher taxes will increase demand for tax-free bonds and keep rates low.

It’s basically a Catch-11, which is half as bad as a Catch-22. Higher taxes are a foregone conclusion for everyone whose earnings exceed $45,000, a consequence of the health-care bill and its enormous future costs. Our government can’t give something to somebody that it doesn’t take from someone else. So your taxes are headed higher. You need to shield your income to keep as much money as you can.

Several months ago, a money manager I know began protecting his clients’ income stream from higher taxes. He uses three strategies to generate tax-free income. He favors placing 45 percent of a client’s tax-free income investments in open-end mutual funds, 45 percent in six of BlackRock’s MuniAsset Funds and 15 percent in various high-yield state-issued bonds.

Among the open-end mutual funds he favors are Vanguard High-Yield Tax-Exempt Fund and T. Rowe Price Tax-Free High Yield Fund.

Vanguard (VWAHX-$10.37) is a no-load fund run by Chris Alwine. It has a four-star ranking, 80 percent of its portfolio is rated BBB or higher and the current yield is 4.71 percent.

T. Rowe Price (PRFHX-$10.73) is a four-star no-load managed by the impeccably credentialed James Murphy. Most of his portfolio is below investment grade, and he occasionally purchases defaulted issues.

The second 45 percent will be invested in a series of BlackRock’s iShares that have planned end dates of 2012 through 2017. Each of these six short-term exchange-traded funds holds at least 20 different national munis.

He puts the remaining 10 percent in individual high-yield issues: The New York City New York Industrial Finance with a 5.75 percent coupon, Las Vegas general obligation bonds and similar issues.

Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, Fla. 33429 or e-mail him at malber@adelphia.net. © Copley News Service