Breakeven Tax Rate (Tax-Free vs Taxable)
Computes the breakeven tax rate between a tax-free bond and a taxable one: the rate at which the after-tax return of the two becomes equal, t* = 1 − (tax-free yield / taxable yield). Above that rate, the tax-free bond (like a municipal) pays off more; below it, the taxable one is worth it even after tax. It's the calculation that decides between the two based on your tax bracket. Enter the yields of the tax-free and taxable bonds.
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Breakeven Tax Rate (Tax-Free vs Taxable)
Computes the breakeven tax rate between a tax-free bond and a taxable one: the rate at which the after-tax return of the two becomes equal, t* = 1 − (tax-free yield / taxable yield). Above that rate, the tax-free bond (like a municipal) pays off more; below it, the taxable one is worth it even after tax. It's the calculation that decides between the two based on your tax bracket. Enter the yields of the tax-free and taxable bonds.
Tax-free or taxable: where the two tie
A tax-free bond, like a municipal, usually pays a lower nominal rate than a taxable bond. The question is: does the tax exemption make up for the lower rate? The answer depends on your tax bracket. The breakeven tax rate is the exact point where the two return the same after tax — above it, the tax-free wins; below it, the taxable does.
The formula is elegant: one minus the ratio of the tax-free yield to the taxable yield. If a tax-free pays 3.5% and a taxable pays 5%, the breakeven is at 30%. Anyone paying more than 30% tax on that income is better off in the tax-free; anyone paying less, in the taxable, even after the tax. It's the calculation that takes the decision out of guesswork.
Enter the yield of the tax-free bond and that of the taxable one, both as a percentage per year. The tool returns the breakeven tax rate. Compare it with your effective tax rate on that type of investment to know which choice pays more in your pocket, after taxes.
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The results provided by this tool are for general informational and educational purposes only and do not constitute professional, financial, medical, legal, tax or accounting advice. Always confirm important decisions with a qualified professional and official sources.