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?
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)