Strategic Tax-Free Income: Leveraging Term Funds in High-Tax Environments

In an era where global capital gains tax rates in major economies range from 10% to over 26%Capital Gains Tax Rates in Europe, 2025, [https://taxfoundation.org/data/all/eu/capital-gains-tax-rates-europe/]^[1], investors face mounting pressure to optimize returns while minimizing tax liabilities. For those in high-tax jurisdictions, term funds like the DTF Tax-Free Income 2028 Term Fund Inc. offer a compelling solution. These instruments combine the stability of fixed-income strategies with the tax advantages of municipal bonds, enabling investors to generate predictable, tax-exempt income.

The High-Tax Landscape: A Catalyst for Tax-Free Strategies

According to a report by the Tax Foundation, the United States imposes a population-weighted average capital gains tax rate of 25.4% in 2025Capital Gains Tax by Country 2025, [https://worldpopulationreview.com/country-rankings/capital-gains-tax-by-country]^[2], while Germany's effective rate reaches 26.4% after solidarity surcharges11 Countries With the Lowest Taxes in the World: 2025 Guide, [https://www.globalcitizensolutions.com/countries-with-low-taxes/]^[3]. In contrast, jurisdictions like Monaco, the UAE, and the Cayman Islands levy no capital gains taxTop 10 Tax-Free Countries to Move To 2025, [https://wakaabuja.com/countries-with-low-tax/]^[4], creating stark disparities in after-tax returns. For investors in high-tax environments, the opportunity cost of forgoing tax-free strategies is significant. For example, a $100,000 investment in a taxable asset yielding 5% would generate $12,500 in annual taxes under the U.S. average rate, compared to zero taxes in a tax-exempt vehicle.

DTF 2028 Term Fund: A Case Study in Tax-Exempt Structuring

The DTF Tax-Free Income 2028 Term Fund Inc., a closed-end fund organized in 1991, exemplifies how term funds can exploit tax-free opportunities. By allocating at least 80% of its assets to investment-grade municipal bondsDTF Tax-Free Income 2028 Term Fund Inc. - dpimc.com, [https://www.dpimc.com/investment-strategies/dtf-tax-free-income-2028-term-fund-inc]^[5], the fund generates income exempt from federal income tax. As of April 2025, its portfolio is diversified across sectors like general obligation bonds (24.6%) and geographies such as Florida (10.2%) and Texas (8.6%)DTF DTF Tax-Free Income 2028 Term, closed-end fund summary, [https://www.cefconnect.com/fund/DTF]^[6], mitigating regional risk while maintaining tax efficiency.

The fund's structure further enhances its appeal. It employs a 32.16% leverage ratioDTF Tax-Free Income 2028 Term Fund Inc. - SEC.gov, [https://www.sec.gov/Archives/edgar/data/879535/000119312523301350/d579665dncsr.htm]^[7], amplifying returns without compromising its tax-exempt status. Shareholders receive monthly distributions of $0.0325 per share (3.45% annualized)DTF Tax-Free Income 2028 Term Fund (DTF) Stock Price, News, [https://www.marketbeat.com/stocks/NYSE/DTF/]^[8], with the potential for state-level tax exemptions on portions of dividends attributable to municipal bonds issued in their state of residenceDTF Tax-Free Income 2028 Term Fund Inc. - dpimc.com, [https://www.dpimc.com/investment-strategies/dtf-tax-free-income-2028-term-fund-inc]^[9]. This dual-layer tax advantage—federal and state—makes DTF particularly attractive for investors in high-tax states like New York or California.

Performance and Risk Considerations

Historically, DTF has aligned with its benchmark, the Bloomberg 5-Year Municipal Bond IndexDTF Tax-Free Income 2028 Term Fund Inc. - Markets Insider, [https://markets.businessinsider.com/funds/dtf-tax-free-income-2028-term-fund-us23334j1079]^[10], which returned 2.6% over the twelve months ending October 2023DTF Tax-Free Income 2028 Term Fund, Inc. - SEC.gov, [https://www.sec.gov/Archives/edgar/data/879535/000119312523301350/d579665dncsr.htm]^[11]. While the fund trades at a 6.76% discount to its net asset value (NAV)DTF DTF Tax-Free Income 2028 Term, closed-end fund summary, [https://www.cefconnect.com/fund/DTF]^[12], this discount reflects market dynamics rather than structural weaknesses, as the fund's focus on investment-grade bonds limits credit risk. However, investors should note that the fund's term ends in March 2028DTF Tax-Free Income 2028 Term Fund Inc. - dpimc.com, [https://www.dpimc.com/investment-strategies/dtf-tax-free-income-2028-term-fund-inc]^[13], requiring a liquidity strategy for redemption.

Strategic Implications for High-Tax Investors

Term funds like DTF offer a unique value proposition in high-tax environments. By leveraging municipal bonds and structured leverage, they provide a stable income stream that outperforms taxable alternatives. For instance, an investor in the U.S. with a 25.4% effective tax rate could achieve a higher after-tax return on DTF's 3.45% distribution than on a taxable bond yielding 4.5%. This makes term funds not just a tax optimization tool but a core component of diversified portfolios.

Conclusion

As global tax rates continue to diverge, the strategic use of term funds becomes increasingly critical. The DTF Tax-Free Income 2028 Term Fund Inc. demonstrates how investors can harness tax-exempt structures to preserve capital and generate predictable income. For those navigating high-tax jurisdictions, such instruments represent a bridge between regulatory complexity and financial efficiency.