As everyone knows, millions of Americans are required to file tax returns every year—this is nothing new.
But if circumstances beyond your control lead you to being in the unfortunate position of owing a significant amount of money to the federal or state tax authorities, it will be an experience you’ll not soon forget—and one you will want to avoid repeating at all costs.
There are several avenues available for you to consider, and now might be an opportune time to ask your tax advisor about the many advantages of fixed-income investments.
More specifically, ask if tax-exempt municipal bonds are right for you.
For many investors the higher numerical yields of taxable fixed income investments, such as corporate bonds, certificates of deposit and U.S. Government bonds, often overshadow their significantly lower after-tax yields.
With so many choices available today, let’s choose a hypothetical example—a taxable fixed income investment—and examine its after-tax yield.
Consider the following:
This example starts with an offering of high-grade corporate bonds in the amount of $100,000, assuming a rating of "AA", a coupon of 6.7 percent and a price of par ($1,000).
Participating investors in the 36 percent federal and 5 percent state income tax brackets (an effective combined tax rate of 39.2 percent) would realize a pre-tax income of $6,700 on their investment.
However, their after-tax income would only amount to $4,073.60—the $2,626.40 difference represents taxes paid to federal and state tax authorities.
The formula used to arrive at this lower after-tax figure is a simple one:
Income earned times the effective combined tax rate equals taxes to be paid, or $6,700(39.20 percent) equals $2,626.40. $6,700 minus $2.626.40 equals $4,073.60)
When trying to create an investment portfolio that’s right for you, consider the advantages of tax-free municipal bonds. IBI