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Author: ljkutten Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35357  
Subject: Re: compare real tax rate versus marginal rate Date: 12/31/2000 7:38 PM
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I disagree with your analysis. To me the issue is not the marginal rate, but how much money is left in my pocket at the end of the day.

Even assuming you are right, you still have to always crunch the numbers.

1. Assume your net income is $105,950. The tax on this amount is $23,965. You are left with a net income of $81,975. (This is a given from the IRS Tax Tables)

Your rich uncle just left you $55,000. Any taxable income generated by this amount is subject to the 31% marginal rate.

According to Vanguard's website today (12/31/00), the Federal Money Market fund pays 6.5%, while the tax exempt municipal fund pays 4.4%.

If you invested the entire $55,000 in Vanguard's Prime Money Market, you would generate $3,575 in taxable income. Assuming you were paying a marginal rate of 31%, your net after tax income would be $2466.75. If you invested the $55,000 in the tax-free money market fund, you net after tax income would be $2420.

Net income on using taxable money market: $84,441.75
Net income on using tax-free money market fund: $84,395

In my book, $84,441 always beats $84,395.

We are perhaps approaching the issue from two different perspectives. I believe my approach is correct and you believe your approach is correct. I don't know you and you don't me. In the for what it is worth category, while I am not a specialist on personal income taxes, I am well versed in reading tax and applying tax code. Maybe I am completly screwing up my analysis. I have that in the past and will undoubtedly will do so in the future.

I have been writing about taxes professionally for nearly 15 years. I sell my tax books primarily to big accounting firms and big software companies. Please see my corporate website, Software Taxation Institute (www.softtax.com) for more background on who I am.

LJK

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