QUESTION: A few months ago I read how to calculate the taxable equivalent rate on a municipal bond fund that is free of both federal and California state taxes. It was so straightforward that I didn't bother to write it down, and now I'm not sure what it was. Can you help?--M. K.

ANSWER: To determine what a taxable investment would have to yield to produce an equivalent tax-exempt yield, you have to know three things: The tax-exempt yield of the bond fund and your state and federal tax brackets. With those elements you can obtain the equivalent pretax yield in five easy steps.

First, subtract your state tax rate from 1.0. From the result, subtract your federal tax rate. Add to that result the product of your federal rate times your state rate. And then divide the tax-exempt rate by the resulting sum.

Thoroughly confused? Try this example worked out by Los Angeles accountant Stephen H. Furman, a tax specialist.

Say you are in the 40% federal tax bracket and the 10% state tax bracket and your bond fund is yielding 8%.

To arrive at the equivalent taxable yield, start with 1.0. From it, subtract the state rate, 0.10. You're left with 0.90, from which you subtract 0.40, your federal rate, to get 0.5.

Now, multiply your state and federal rates (0.10 x 0.40 = 0.04) and add the result to 0.5 for a total of 0.54. Divide that sum into the tax-exempt rate (0.08). The result, 14.8%, is the taxable equivalent yield.

Now let's say, for argument's sake, that your bond fund is free from federal taxes but subject to state tax. To get the taxable equivalent in this example, you first have to adjust the tax-exempt rate to account for the state tax.

Calculators ready? Once again, start with 1.0, subtract your state and federal tax rates and add to the result the product of the two rates. Once again, you arrive at 0.54.

But instead of dividing 0.54 into the 8% tax-exempt rate, you divide it into 0.0752, which is the adjusted tax-exempt rate.

To find the adjusted rate, multiply your federal rate by your state rate (0.04) and subtract that number from the state rate (0.10). Then, multiply the remainder (0.06) by the tax-exempt rate (0.08) to get 0.0048.

Subtract that result from the tax-exempt rate (0.08 minus 0.0048), which leaves you with 0.0752. Finally, divide 0.0752 by 0.54 to get 13.9% as the taxable equivalent rate.

There is, of course, a much easier way. Just ask any municipal bond dealer for a chart that does the conversions for you.

Q: I have heard that mutual fund management fees are tax deductible, but I've yet to see it anywhere in print. I'm referring to those small percentages (ranging from 0.25% to 1% of the average daily closing net asset values) that a mutual fund pays its investment manager for managing the funds, per its prospectus. Are such fees deductible?--L. W.

A: As an owner of a mutual fund, you don't directly pay the fee, so you have nothing to write off. Rather, the management fees are taken directly from the fund's income. That does mean your taxes are lower since your taxable income is reduced.

Q: When I retired four years ago, I received a lump sum of cash and stock. The year after retiring, I paid federal income tax using 10-year forward averaging and state income tax using seven-year averaging. I still have the stock, but, when I sell all or part of it, do I calculate the gain or loss using as a base the date it was purchased or the date I received it upon retirement?--J. C. O.

A: Your capital gain or loss will be figured on the difference between the market value on the day it is sold and the stock's value when it was purchased.