Tax Bracket vs Effective Tax Rate

Forum|Forum|2 years ago
April 12, 2024
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Tax Bracket and effective Tax rates are 2 different thing and I understand difference.

Due to long term gain one is pushed into higher tax brackets than tax rate and difference can be more than 10%.

Q: Let say my tax bracket is higher than effective tax rate, for bond investment whether which bond investment make sense taxable bond or muni bonds, which number to use?

Usually in many online calculators ask your tax bracket to find out tax equivalent yield of muni bond but is it reliable measure if you higher tax bracket is coming via long term gains?

Best answer by JulieS

Yes, your tax bracket is a more accurate way to predict the tax impact of additional taxable income such as taxable bond interest.

RobertB4444

A reliable online tax calculator would require information on capital gains vs regular income in order to calculate your actual tax bill accurately.

As far as bond investment I don't understand the question. Which bond do you have? That's the one you put into the calculator. And tax free municipal bonds aren't included in your AGI so they won't move the needle.

@sam992116

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sam992116Author

Lets assume my Tax Bracket is 30% but my tax rate is 22%

When ever you buy muni bond there is yield. Lets say Muni Bond has Yield of 4% but what is tax equivalent yield and that most online calculator use your tax bracket.

Lets say your tax bracket is 30%. Tax equivalent yield will be = yield/1 -0.3 = 4 /.7 = 5.71%

But if I use Tax rate. It is 4 / 1 - 0.22 = 5.12%

But lets say I have found similar credit rating taxable bond with yield of 7 % and even though I have to pay tax on that one. After paying tax I will be still ahead of muni bonds.

That was my question is it Tax bracket which lets say is 30% but my tax rate is 22% (due to quite bit of long term capital gains).

Q: What is better way to judge which is better choice to taxable or tax free bonds? Tax bracket or Tax Rate

@RobertB4444