The table below illustrates a hypothetical example of a $10,000 investment earning interest of 4.0%, assuming a 30% tax bracket. As demonstrated, investment income would be $120 more in the tax-free investment.
What Yield Would a Taxable Security Have to Pay to Match a Tax-Free Bond?
As the table below shows, individuals in the 33% Federal tax bracket would have to find a CD or other taxable investment yielding 5.97% to equal a tax-free bond yielding 4.0%. For residents with state and city income taxes, the taxable equivalencies can be even higher.
Tax-Free vs. Taxable: 2016 Federal Tax
Find Out How Much Tax-Free Investing Can Benefit You:
Our bond calculator will estimate the tax-equivalent yield for a municipal bond and can be customized based on your income and tax filing status.
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Download a printable chart that includes Connecticut, New Jersey, and New York State tax brackets:
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Tax advantages depend on the individual’s income tax bracket. Since the enactment of the Federal Tax Amendment in 1913, the Internal Revenue Code has provided a specific exemption for municipal bonds. Generally, investors must purchase municipal bonds from their home state to be free of Federal, state and local income taxes. Investors need to consider the impact of inflation on their investments. Interest earned on certain municipal bonds is subject to the alternative minimum tax (AMT). Investors should consult with their tax preparer or tax advisor to determine if they are subject to AMT.