Munis vs. Taxables: How to Determine the Taxable Equivalent Yield
by Maria Crawford Scott
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.
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However, tax-advantaged bonds generally offer a lower coupon rate than taxable bonds of similar maturity, such as government bonds.
How do you compare the yields of bonds that receive different tax treatments?
A relatively simple formula can help you put the yields on an equal footing.
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Discussion
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?
posted over 2 years ago by Donald from Michigan
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.
posted about 1 year ago by C from Florida
