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Munis vs. Taxables: How to Determine the Taxable Equivalent Yield

by Maria Crawford Scott

Munis Vs. Taxables: How To Determine The Taxable Equivalent Yield Splash image

With yields on the safest fixed-income investments still very low, one way to boost your bottom line is to shield that income from further erosion.

Interest income that is sheltered from federal taxation—and possibly state and local taxes as well—has always been the main attraction of municipal bonds.

However, tax-advantaged bonds generally offer a lower coupon rate than taxable bonds of similar maturity, such as government bonds.

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Maria Crawford Scott is the former editor of the AAII Journal.


Discussion

Donald from Michigan posted over 3 years ago:

Is there a formula to actually calculate your marginal tax rate or is it simply where your taxable income falls after you find your AGI and remove all deductions and exemptions?


C from Florida posted over 2 years ago:

The paragraph starting with "While alternative minimum tax and Social Security tax considerations may diminish the aftertax benefits of tax-exempt interest income" is misleading.
Social security tax considerations does NOT diminish the aftertax beefits of tax-exempt intrest income.
Take an example of an investor trying to choose between investing $10,000 in 10 bonds. According to table 2, he will receive $372 in treasury bond and $332 per year in tax-exempt.
If treasuries, the $372 is part of the Social security calculation. If tax-exempt, the $332 would be part of the Social Security calculation.
So, tax-exempt investment results in a very slight advantage over treasuries.


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