"Rich Carreiro" <rlcarr[at]animato.arlington.ma.us> wrote in message
news:m3vfc1ses6.fsf[at]animato.home.lan...
- quote -

Excellent explanation, thanks!

BB


---
Outgoing mail is certified Virus Free.
Checked by AVG anti-virus system (http://www.grisoft.com).
Version: 6.0.799 / Virus Database: 543 - Release Date: 11/19/2004

"Blind Broccoli" <blindbroccoli[at]yahoo.com> writes:

- quote -

I'm using "incremental" in the mathematical term, so it can
mean positive or negative.

But in any event, just work it out.

Assume you currently have principal P in taxable bond fund ABC
with taxable yield Yt. You then switch P from ABC into tax-exempt
bond fund XYZ with tax-exempt yield Ye.

Pulling P out of ABC will reduce pre-tax taxable income by P*Yt. That
will in turn reduce your taxes by P*Yt*Tm (where Tm is your marginal
rate). So your after-tax decrease in income is:
P*Yt - P*Yt*Tm = P*Yt*(1 - Tm)
Because lowering your taxable income lowers your taxes, your final
after-tax decrease in income isn't as much as the "raw" decrease
in income.

On the other side, putting the P into XYZ increases your pre-tax income
by P*Ye. Since that income isn't taxable, the after-tax increase in
income is also P*Ye.

Since we want the switch to make money, we require that the increase
in income more than the decrease in income, or
P*Ye > P*Yt*(1 - Tm)
Ye > Yt*(1 - Tm)
or
Yt < Ye/(1 - Tm)

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

"Rich Carreiro" <rlcarr[at]animato.arlington.ma.us> wrote in message
news:ur7mqzl8o.fsf[at]animato.arlington.ma.us...
- quote -

If I sell some taxable bond funds and substitute tax frees, or vice versa, I
hope by my decision to generate greater after-tax income. But there is no
guarantee that I have made the right choice. If I am wrong, I will have no
incremental income. I will have a decline in income. So aren't I just
guessing by plugging in the marginal rate to determine whether or not to buy
tax frees vs taxables, unless this is new money (from outside my investment
portfolio), in which case the marginal rate would obviously be the one to
use?

BB


---
Outgoing mail is certified Virus Free.
Checked by AVG anti-virus system (http://www.grisoft.com).
Version: 6.0.799 / Virus Database: 543 - Release Date: 11/19/2004

Chris Thomas <cthomas[at]mminternet.com> wrote:
- quote -

The marginal rate is the one to use because it will show you the change
in income between various investments.

--
Ron

Chris Thomas<cthomas[at]mminternet.com> writes:

- quote -

You have to use the marginal rate.

The effective (or average) rate is meaningless, because
it tells you absolutely nothing about how the next $1
will be taxed.

- quote -

Marginal. Because incremental income is taxed at the marginal
rate, not the average/effective rate.

--
Rich Carreiro rlcarr[at]animato.arlington.ma.us

In trying to compare taxable vs.taxfree investments, I am confused as to
which "rate" to use.

I know the formula is ( Tax-eq rate = taxfree / (1-tax bracket) )

I could use either my marginal rate (eg, my federal bracket), or my
"effective" rate, which is (my tax bill / my AGI). I'm in a high
bracket. These two numbers are quite different for me.

If I consider Calif. munis vs corporate bonds, if I use my tax bracket,
munis are clearly the better deal. However, if I use my effective rate,
it looks like corporates win. I have a gut feeling that my marginal rate
is the correct way to evaluate marginal income, but I'm suspicious about
the degree of difference.

Which is the correct way to look at the value of marginal (ie, an
additional investment) income, and why?

Thanks for any insights,
/Chris