Which Bonds Are Right for You?

Taxable or nontaxable? When investing in bonds, that is a key question. To answer it, figure your marginal tax bracket for both state and federal taxes, and then compare the yields on taxable investments to the “taxable equivalent” yield on tax-free bonds.

Here’s a step-by-step guide:

1. Determine your marginal federal income tax bracket*:

Single, with taxable income of:


up to $20,050: 15%

$20,051 to $48,450: 28%

$48,451 to $73,850: 31%

$73,851 to $131,875: 36%


$131,876 and up: 39.6%

Married, filing jointly, with taxable income:

up to $40,100: 15%

$40,101 to $96,900: 28%

$96,901 to $147,700: 31%

$147,701 to $263,750: 36%

$263,751 and up: 39.6%

My marginal federal tax rate: %



2. Determine your marginal state income tax bracket*:

Single, with taxable income of:

up to $4,908: 1%

$4,909 to $11,632: 2%

$11,633 to $18,357:4%

$18,358 to $25,484: 6%

$25,485 to $32,207: 8%


$32,208 and up: 9.3%

Married, filing jointly, with taxable income of:

up to $9,816: 1%

$9,817 to $23,264: 2%

$23,265 to $36,714: 4%

$36,715 to $50,968: 6%

$50,969 to $64,414: 8%

$64,415 and up: 9.3%

My marginal state tax rate:* *

3. Determine your combined rate by adding the answer from question 1 to the answer from question 2. (This is a simplified approach. The actual combined rate would take into account that state taxes are deductible on your federal tax return.)

My combined rate: %


4. Current yield on taxable corporate bonds? (will vary based on the maturity you choose to compare)**



5. Current yield on the type of Treasury issue you are interested in (ranging from 3-month bill to 30-year bond)**? %


6. Adjust your Treasury yeild to accont for exemption from tax. (If your state tax rate is 9.3%, or 0.093, for example, you would subtract that number from 1. The result: 0.907. Consequently, if the going Treasury yield is 6%, your taxable equivalent yield is 6 divided by 0.907, or 6.615%.--meaning a 6% Treasury yield is equivalent to a 6.62% fully taxable yield, such as on a corporate bond or bank CD.) My taxable-equivalent yield:


7. Current yield on California double-tax-free municipal bond (use a maturity range similar to the one you used for the Treasury issue; don’t, for example, compare short-term Treasury bill yields with yields from long-term municipal bonds)**? %


8. Determine your taxable-equlvalent yield on tax-free municipal bonds. (Divide the answer on line 6 by the inverse of your combined federal and state tax rate. For example, if the yield on municipal bonds is 5% and your combined state and federal tax rate is 45.3%, or 0.453, you’d subtract 0.453 from 1, to get 0.547. Divide 5 by 0.547 to find your taxable equivalent yield of 9.14%.)

My taxable-equivalent yield:


9. Compare the results for questions 4, 6 and 8. If you are in a lower tax bracket, your yield is likely to be highest on the taxable corporate bonds. However, if you’re in a higher bracket for either state or federal taxes, a tax-free bond may land you more after-tax income.

* The state and federal tax brackets listed here are for the 1996 tax year.

** Obtain current numbers from a broker or a daily newspaper. In The Times, you can find an index of yields on taxable corporate bonds and yields on Treasury issues in the Money Rates chart on the Market Roundup page. In addition, an index of yields on California municipal bonds is in the California Municipal Bonds chart that runs Tuesdays in Wall Street, California. If you prefer to compare the yields on specific bonds, call a broker, but make sure the bonds you are comparing have like maturities and default risks. You want, for instance, to compare a 30-year AAA-rated municipal to a 30-year AAA-rated corporate to a 30-year Treasury.