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MONEY SAVVY WEEKEND

Financial Planner

July 02, 1999

The Real Deal: Finding the After-Tax Yield

Does it make sense for you to invest in municipal bonds or a tax-free money market fund? Ever wonder what your mortgage really costs after taxes are figured in? Knowing how to figure after-tax equivalent yields can help you find the answers to these and other tax-related questions. First, you need to know your federal and state income tax brackets. Figures for 1998 are supplied because 1999 state brackets are not yet known. Then use the following work sheets to find out what you need to know. Enter percentages in decimal format. For example, 4.25% would be entered as .0425. Carry all calculations out to at least four decimal places for the most accurate results.

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Figuring the taxable equivalent yield of a tax-free return.

This part of the work sheet allows you to translate a tax-free return to its taxable equivalent. For example, this can help decide whether you're better off investing in municipal bond and tax-free funds or in taxable bonds or funds.

1. Enter the tax-free yield you want to compare.

2. Enter your federal tax rate.

3. Enter your state tax rate.

4. If you take the standard deduction, add lines 2 and 3. If you itemize your federal deductions, enter the "Combined tax bracket" figure from the chart above.*

5. Subtract line 4 from 1.00.

6. Divide line 1 by line 5.

This is the rate you would have to get in a taxable investment to match the tax-free yield.

*

Figuring the tax-free equivalent return of a taxable yield.

This part of the work sheet allows you to compare after-tax returns. For example, this can help you measure the real, after-tax cost of your mortgage. Knowing this number can help you decide whether it makes sense to pay off a mortgage early or if you can get a better investment return elsewhere.

1. Enter the taxable yield (or mortgage rate) you want to compare.

2. Enter your federal tax rate.

3. Enter your state tax rate.

4. If you take the standard deduction, add lines 2 and 3. If you itemize your federal deductions, enter the "Combined tax bracket" here.*

5. Subtract line 4 from 1.00.

6. Multiply line 1 by line 5.

This is the rate you would have to get in a tax-free investment to match the taxable yield; alternately, this is the after-tax cost of your mortgage.

Single

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Taxable income Federal State Combined bracket 0-$5,131 0.15 0.01 0.1585 5,131-12,161 0.15 0.02 0.1670 12,161-19,193 0.15 0.04 0.1840 19,193-25,350 0.15 0.06 0.2010 25,351-26,644 0.28 0.06 0.3232 26,644-33,673 0.28 0.08 0.3376 33,673-61,400 0.28 0.093 0.3470 61,401-128,100 0.31 0.093 0.3742 128,101-278,450 0.36 0.093 0.4195 278,450 and over 0.396 0.093 0.4522

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Married filing jointly

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Taxable income Federal State Combined bracket 0-$5,131 0.15 0.01 0.1585 0-$10,262 0.15 0.01 0.1585 10,262-24,322 0.15 0.02 0.1670 24,322-38,386 0.15 0.04 0.1840 38,386-42,350 0.15 0.06 0.2010 42,351-53,287 0.28 0.06 0.3232 53,288-67,346 0.28 0.08 0.3376 67,347-102,300 0.28 0.093 0.3470 102,301-155,950 0.31 0.093 0.3742 155,951-278,450 0.36 0.093 0.4195 278,450 and over 0.396 0.093 0.4522

*--*

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* State income taxes are generally deductible on a federal income tax return if you itemize deductions, so they are subtracted from the equation. You can determine a combined tax bracket by using the following formula: [federal rate + (1-federal rate) times state rate].

Note: California municipal bonds are exempt from both state and federal taxes. Treasury bonds and certain other federal obligations are subject to federal taxes but are exempt from state taxes. To compare such bond yields, you can apply the formulas using only federal tax rates.

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