What’s the effect of state income taxes?

Wednesday, December 20th, 2006
Categorized as: Savings Bond interest rates

If a Savings Bond is earning 3.60% and isn’t subject to state income tax, what is the equivalent rate for an investment that is subject to state income tax?

Tom’s response

The formula you’re looking for is [savings bond rate] / ( 1 – [state tax rate]).

For example, if your state income tax rate is 5%:

  • 1 – .05 = .95 (the percentage you get to keep after taxes)
  • 3.6% / .95 = 3.789% (the equivalent taxable yield you’d need to equal the state-tax-free yield)
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FDIC Insured Certificates of Deposit can pay 1 or 2% more than savings bonds when held for a similar length of time. See top CD Rates Below:

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June 1, 2010

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