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Author: vickifool Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35367  
Subject: Re: CD or treasury bill ? Date: 6/20/2006 11:39 AM
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I agree with Mark that there can be complications, but the basic formula for 'tax equivalent yield' is:
yield / (1 - exempted tax rate)

In the case of T-Bills, we'd be talking about state taxes.

Here in Mass we have a relatively simple, 5.3% flat state tax rate, or 0.053.

So for a 5% T-Bill, to use round numbers, we're looking at:
5 / (1 - 0.053) = 5 / .947 = 5.28%

You can also adjust for state taxes being deductible from federal taxes. Exempting interest income from state taxes lowers your deduction and raises your federal tax. Assume your marginal federal tax bracket is 28%

5 / (1 - 0.053(1 - 0.28)) = 5 / (1 - 0.053(.72)) = 5 / (1 - 0.038) = 5.20

California state taxes are up to 9.3%

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