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Taxable equivalent
Q
If you know the interest rate of a muni bond, how do you find the real rate, that is, what it be if it were taxable?
A
James A. Klotz responds:
There is a simple formula for determining the taxable equivalent of municipal bond yields. First, determine your tax bracket. Then divide the reciprocal into the tax-free yield you are evaluating. (You will find the reciprocal by subtracting your tax bracket from 100.) For example: If you are in the 25% bracket, divide the 4.75% tax-free yield by 75 (4.75 / 75 = 6.33%). In the 28% tax bracket divide 4.75% by 72 (4.75 / 72 = 6.60%). You may also wish to visit our Bond Basics page.
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