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What is the amount of difference between a fully taxable $1,000 investment earning 8.1 percent or a $1,000 tax-exempt investment earning 6.1 percent? (Assume a 28 percent tax rate)

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Final answer:

The amount of difference between a fully taxable $1,000 investment at 8.1% and a tax-exempt investment at 6.1%, when considering a 28% tax rate, is $2.68 favoring the tax-exempt investment after taxes.

Step-by-step explanation:

When comparing a fully taxable investment with a tax-exempt investment, it is important to consider the impact of taxes on the returns. A $1,000 investment earning 8.1% will yield $81 before taxes. After applying a 28% tax rate, the after-tax return is $81 - 0.28 × $81 = $58.32.

On the other hand, a $1,000 tax-exempt investment earning 6.1% yields $61, and since it is tax-exempt, the entire $61 is the investor's to keep. The difference between the two investments, therefore, is $61 (tax-exempt return) - $58.32 (taxable after-tax return) = $2.68. This amount is the extra earnings from the tax-exempt investment as compared to the fully taxable investment after accounting for taxes.

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