The Internal Revenue Code allows individuals to treat interest income from
most municipal obligations as tax exempt. This beneficial tax provision
enables municipal entities to raise capital more cheaply to fund their
development and operations.
For individuals, the benefit of tax exempt interest income can be
attractive if they are in a high income tax bracket. To determine if the tax
exempt route is right for you, it is necessary for you to compare the after
tax yield of a taxable bond to the yield of a tax exempt bond. It's important
to compare bonds of similar maturity dates and similar quality.
To calculate the after tax yield of a taxable bond you can use the
following formula:
For example, here is the equation to calculate the after tax yield of a
taxable bond with a yield of 6% for someone in the 35% marginal tax bracket.
AFTER TAX YIELD = 6% - (6% X .35)
= 6% - (2.1%)
= 3.9%
Or you can use the following table:
| Tax exempt yield |
Equivalent taxable yields in these marginal tax
brackets |
|
15% |
25% |
28% |
33% |
35% |
3.0% |
3.5 |
4.0 |
4.2 |
4.5 |
4.6 |
3.5% |
4.1 |
4.7 |
4.9 |
5.3 |
5.4 |
4.0% |
4.7 |
5.3 |
5.6 |
6.0 |
6.2 |
4.5% |
5.3 |
6.0 |
6.3 |
6.8 |
6.9 |
5.0% |
5.9 |
6.7 |
6.9 |
7.5 |
7.7 |
5.5% |
6.5 |
7.3 |
7.6 |
8.3 |
8.5 |
The tax brackets are those in effect in 2004.
Remember, to get a true comparison, it is critical that the taxable and
tax exempt bonds have similar maturity dates and similar quality ratings.
