HOW TO CALCULATE YOUR TAXABLE EQUIVALENT YIELD FOR FEDERAL AND STATE TAXES

To figure your taxable equivalent yield for both federal and state taxes, use this formula:

Let's try an example using the 27 percent tax bracket and the 6 percent municipal bond rate. Let us assume you pay a state tax of 8 percent.

When state taxes are also taken into account, you would have to earn 8.93 percent on a taxable bond to equal your 6 percent municipal bond.

When both federal and state taxes are taken into account, the taxable equivalent yield is higher than the federal taxable equivalent yield. Also, the higher your state tax, the bigger the impact.

Next, we will look at how your taxable equivalent yield changes as your tax bracket changes. This can affect whether you choose municipal bonds or taxable bonds.