Question

Tammy, a resident of Virginia, is considering purchasing a $100,000 North Carolina bond that yields 4.6% before tax. She is in the 35% Federal marginal tax bracket and the 5% state marginal tax bracket. Tammy is aware that State of Virginia bonds of comparable risk are yielding 4.5%. Virginia bonds are exempt from Virginia tax, but the North Carolina bond interest is taxable in Virginia. Tammy can deduct any state taxes paid on her Federal income tax return. In your analysis, assume that the bond amount is $100,000. If required, round your computations and answers to the nearest dollar. Assume that Tammy itemizes her deductions for federal taxes. Determine the after tax income from each bond.

Answer 1

After tax income from Virginia bond = $100000*4.5%

After tax income from Virginia bond = $4,500

After tax income from North Carolina bond = (100000*4.6%) * (1-5%) +(100000*4.6%*5%*0.35)

After tax income from North Carolina bond = $4,600*0.95 + $80.5

After tax income from North Carolina bond = $4,370 + $80.5

After tax income from North Carolina bond = $4,450.5

After tax income from North Carolina bond = $4,451