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Determine the yield on tax free bonds
When investing in bonds, it's important to understand the different tax treatments applied to the different kinds of products. For example, income from most municipal bonds, or munis, is exempt from regular federal income tax. Likewise, income from a U.S. Treasury bond is free from state and local income taxes. These exemptions apply only to the interest paid by these bonds. Earnings from any capital gains are still taxable.
Since our focus is to gain interest that is federal income tax free and will not count toward your adjusted gross income (AGI). The higher your income tax bracket, the more advantageous the after-tax yield of munis may be for you.
Taxable-Equivalent Yields for municipal Bonds
There are municipal bond calculators that will calculate the tax-equivalent yields base on the bond yield and your tax bracket.
Taxable-Equivalent Yields for Individual Bonds - for example, a 2.5% muni yield will have a tax-equivalent yield of 3.2% for a person at the 24% federal tax rate
Taxable-Equivalent Yield Calculator -
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