Your marginal tax bracket determines how much of the earnings from savings and investments you get to keep after taxes. Below are the four individual tax rate schedules for 2002:
|Taxable Income ($)||Effective Rate (%)|
|Married Filing Jointly||0 to 12,000||10|
|12,001 to 46,700||15|
|46,701 to 112,850||27|
|112,851 to 171,950||30|
|Head of Household||0 to 10,000||10|
|10,001 to 37,450||15|
|37,451 to 96,700||27|
|96,701 to 156,600||30|
|Single||0 to 6,000||10|
|6,001 to 27,950||15|
|27,951 to 67,700||27|
|67,701 to 141,250||30|
|Married Filing Separately||0 to 6,000||10|
|6,001 to 23,350||15|
|23,351 to 56,425||27|
|56,426 to 85,975||30|
|Higher 35% and 38.6% marginal tax brackets are also in effect for higher income taxpayers with incomes above the upper limit of the 30% rate.|
|Tax-Exempt Yield (%)||Taxable Equivalent Yield (%) for Tax Rate of:|
|15% Tax Bracket||27% Tax Bracket||30% Tax Bracket|
*Federal income tax rates only. Does not include state income tax.
If you cannot find a specific rate on the chart you can compare yields by using the following formula:
Taxable equivalent yield = tax-free yield ÷ (100% - marginal tax bracket %)
Example: Assume you are in the 27% tax bracket, and have an account with a 4.5% tax-free yield. To get the equivalent taxable yield, divide 4.5% by 73% (100% - 27%). The taxable yield is 6.16%.
Once you know how to calculate tax equivalent yields, it's time to go shopping and compare rates of return offered on various investment products. Next, determine which will pay a higher after-tax rate.
Generally speaking, people in the 10% and 15% tax brackets earn more after taxes with taxable saving and investment products. Those in higher tax brackets, usually do better with tax-exempts.
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