A taxpayer is in the 28 percent tax bracket and invests it in a San Diego City Bond paying 7 percent. What taxable interest rate will provide the after-tax return?
I don't understand the formula, so can you show me how it's calculated,please.
You would pay 28% which means you will be able to keep 72% (100-28)
You will then have 72% of 7%
or .72 times .07 will give the correct answers.
(1-.28)(.07) is the specific formula. Can you come up with a general formula?
To calculate the taxable interest rate that will provide the after-tax return, you will need to use the following formula:
After-Tax Return = Taxable Interest Rate x (1 - Tax Bracket)
In this case, the taxpayer is in the 28 percent tax bracket and is investing in a San Diego City Bond that pays 7 percent. Let's calculate the taxable interest rate that will provide the after-tax return:
Step 1: Convert the tax bracket into a decimal. 28 percent is equal to 0.28.
Step 2: Plug the values into the formula:
After-Tax Return = Taxable Interest Rate x (1 - Tax Bracket)
After-Tax Return = 7% x (1 - 0.28)
Step 3: Simplify the formula:
After-Tax Return = 0.07 x 0.72
Step 4: Calculate the after-tax return:
After-Tax Return = 0.0504 or 5.04%
So, in order to achieve an after-tax return of 5.04%, the taxpayer should invest in a bond that pays an interest rate of approximately 5.04%.