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Daniel Matthews, Financial Planner at High Peaks Wealth Strategies, LLC

Printed from: www.highpeakswealthstrategies.com

Taxable Equivalent Yield

Taxable vs. Tax-Exempt Yields

If the municipal bond was issued by the state in which you live, the interest is normally free of state taxes. Although the interest income may be tax-free, any capital gains will be subject to taxation.

Municipal bonds are sold by cities, counties, states and other political bodies (public hospital, school district).

The federal government and its agencies do not sell municipal bonds. However, most municipal bonds are free of federal income taxes, although they may be subject to the alternative minimum tax. Because of this, the stated interest rate on municipal bonds is typically lower than comparable non tax-exempt bonds.

How much would you have to receive from a taxable bond to realize an equivalent yield? You can find the answer by entering the following information:

The results below show the rate of return you would have to receive from a taxable investment to have the same after-tax income as you would from a tax-exempt alternative, such as a municipal bond. The higher your federal income tax bracket, the greater the taxable return required to make your after-tax income the equivalent of a tax-exempt investment.

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Your Results
Description Amount
The yield on the municipal bond you are considering: 0%
Your federal income tax bracket: 0%
A comparable taxable bond of equivalent risk would have to yield: 0%

Note that in some states you will have to pay income tax if you buy bonds that have been issued by other states. In addition, while municipal bonds are not subject to federal income taxes, they may be subject to federal, state, or local alternative minimum taxes. If you sell a tax-exempt bond at a profit, there are capital gains taxes to consider. The principal value of bonds fluctuates with market conditions. Bonds redeemed prior to maturity may be worth more or less than their original cost. This hypothetical example is used for illustrative purposes only. Results do not reflect the actual performance of any particular investment vehicle.

This chart shows the taxable yield you would need to achieve at your tax rate to generate after-tax income equivalent to that of a tax-free vehicle.

Tax-Exempt Yield vs. Taxable Yield

Note that in some states you will have to pay income tax if you buy bonds that have been issued by other states. In addition, while municipal bonds are not subject to federal income taxes, they may be subject to federal, state, or local alternative minimum taxes. If you sell a tax-exempt bond at a profit, there are capital gains taxes to consider. The principal value of bonds fluctuates with market conditions. Bonds redeemed prior to maturing may be worth more or less than their original cost. This is a hypothetical example intended for illustrative purposes only. Results do not reflect the actual performance of any particular investment vehicle.

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