I have no idea

Question

The question is: the town of Dudley municipal bonds are yielding at 4%. Assume your federal tax rate is 22% and your state tax rate is 3%. What % (two decimal places) would you need to earn in a fully taxable investment to make your after tax returns the same?

Answer 1

Hi Mackenzie.

 

The municipal bonds are paying 4%.  

 

To determine the equivalent taxable rate, we want a rate which after paying federal taxes (22%) and state taxes (3%) will yield 4%.

 

.22+.03 = .25

 

1-.25 = .75

 

4% / .75 = 16%/3 = 5.33%

 

With a 22% federal tax rate and a 3% state tax rate, a 5.33% taxable return is equivalent to a 4% municipal bond return.