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ljkutten wrote:
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.

Actually, you agree with my analysis. :-) (Or mabe I agree with your analysis, depending on one's point-of-view)

We're trying to determine the exact same thing (how much money is left in my pocket at the end of the day). I was simply pointing out that, in many (most) instances, you need to apply the marginal rate to determine that amount.

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%.

In such a case, you are correct. You would choose the taxable fund, rather than the tax-exempt fund. And as you note, you would use the marginal rate in making this calculation, rather than your overall tax percentage on all income. (Now, if you had 15,000 in taxable income (all wages), and an additional 100,000 in interest (which would mean somewhere over 1.5 million in principal. Such problems we should have), you would care about the overall rate on that 100,000 (part of which would 15%, part would be 28%, and a small part would be 31%)

FWIW, many people will find themselves better off investing in a taxable fund rather than the tax-exempt fund. Why? Because the vast majority of investors in tax-exempt instruments are at very high marginal tax rates.

A quick calculation on the numbers you showed above reveals that anyone paying at less than a 32% tax rate (32.3%, to be precise) is better off investing in the taxable fund than the tax-exempt fund.

(Also, most "tax-exempt" funds are only expempt at the federal level, although some will also be exempt in various states)

We are perhaps approaching the issue from two different perspectives. I believe my approach is correct and you believe your approach is correct.

I think we are trying to do the same thing, but approaching it from different angles. You are definitely correct in that the important thing is "how much money do you have left in your pocket at the end of the day." I have written essentially the same thing in a few articles. For example, from http://www.fool.com/workshop/1999/workshop991021.htm

"Earning 15% after taxes is always better than earning 10% tax-free. If you are investing to make money, it's more important to maximize your net return than to minimize your taxes."

I don't know you and you don't me

True. Thanks for the rundown of your credentials and the link provided (checked it out quickly, looks like an intersting site). FWIW, I'm allegedly a "tax professional", in that I'm a also a lawyer (J.D.) with an LL.M. in tax law (schools are listed in my profile, if you're curious). I currently work for a large corporation on international tax issues, although that's corporate, not individual. I should note that my "official" duties at the Fool do not currently include anything in the tax area; that area is covered by Roy Lewis (TMFTaxes) and Phil Marti (TMFExRO).

I think we are agreeing on the analysis to be applied. I was concerned by your response in post 1217, which seemed to imply that you would use a different methodology than what you presented in post 1219.

Any further discussions might be minor technical points, so perhaps we should continue this by email if you wish. If the prior several posts on these points have confused anyone else, feel free to post on the board. Again, I think we're saying the same thing from two different angles.

hope this helps,

-synchronicity

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