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Author: blearynet Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35363  
Subject: on the fence Date: 1/6/2007 2:16 PM
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I am unclear about what to do with the fixed income part of my portfolio, and so I have been simply buying 6 month T bills and CDs. However, due to the reinvestment interest rate risk, I know I should do something a bit more long term than 6 months : )

I am 28% tax bracket, and 9.3% state tax. I have about 300k to put into fixed income, and am about 5 years from retirement. I cannot seem to figure out whether I should try to find California muni bonds (our state of residence) or just buy a bond fund. I am reluctant to buy a long term bond fund because of interest rate risk. At present, I have the Vanguard tax-free intermediate term bond fund (VGAIX), but don't know if I should put more into that, or use some other fund(s) or buy individual bonds.

Can anyone elucidate this for me? Thanks in advance.
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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19304 of 35363
Subject: Re: on the fence Date: 1/6/2007 2:41 PM
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I am 28% tax bracket, and 9.3% state tax. I have about 300k to put into fixed income, and am about 5 years from retirement.

What do you anticipate for taxes when you retire? California Munis would certainly seem like a good option for the next 5 years, but if it's only for 5 years, you aren't likely to beat 3.9%, which is what you'd get for Pen Fed 5-year CDs after taxes. If you're married, you can get $300,000 in protection at Pen Fed. If single, just $100,000, but I doubt they will go under in next 5 years.

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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: 19457 of 35363
Subject: Re: on the fence Date: 1/18/2007 9:14 PM
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Hi bleary,

When I was five years from retirement, I wish I had put 5 year's worth of expenses into a fixed-income ladder. VickiSpouse just retired last July. I'm trying to figure out the cash flow now.

Like you, it's 28% federal and 9.3% CA taxes in general. I decided that holding "bonds" to maturity made the most sense to me. It's an investment I can understand. Bond funds or selling bonds before maturity are confusing at best. ("Bonds" for me include Treasuries and CDs.)

When I last ran the numbers, Treasuries (no CA tax) beat both CDs and Munis. Munis seem aimed at the 33% tax bracket. Do Munis trigger AMT?

Quickly checking 5-year non-callable rates:
CDs 5.10
Treasuries 4.70
AAA Munis 3.75

Assume $100,000 to make the math easy. You plug in your own numbers.
CD interest = 5100
CA tax on interest = 5100*.093 = 474.30
US tax on interest = (5100-474.3)*.28=1295.20
after tax from CD= 5100-474.30-1295.2 = 3330.5

Treasury interest = 4700
no CA tax. US tax = 4700*.28 = 1316
After tax from T-bill = 3384

Muni interest = 3750. No tax.

That's how I do it.

Vickifool






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Author: jrr7 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19458 of 35363
Subject: Re: on the fence Date: 1/19/2007 10:13 AM
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CD interest = 5100
CA tax on interest = 5100*.093 = 474.30
US tax on interest = (5100-474.3)*.28=1295.20
after tax from CD= 5100-474.30-1295.2 = 3330.5


Don't you deduct your California taxes on your Federal return? If so that would mean you have an additional 474.30*.28=132.80

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Author: Wradical Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19459 of 35363
Subject: Re: on the fence Date: 1/19/2007 10:33 AM
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CD interest = 5100
CA tax on interest = 5100*.093 = 474.30
US tax on interest = (5100-474.3)*.28=1295.20
after tax from CD= 5100-474.30-1295.2 = 3330.5
__________________________________
Don't you deduct your California taxes on your Federal return? If so that would mean you have an additional 474.30*.28=132.80

__________________________________
Not if AMT applies. There's no deduction for taxes for AMT purposes. And I noted that the federal rate quoted, 28%, is the upper AMT rate.

Bill

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Author: markr33 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19460 of 35363
Subject: Re: on the fence Date: 1/19/2007 10:46 AM
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<<<CD interest = 5100
CA tax on interest = 5100*.093 = 474.30
US tax on interest = (5100-474.3)*.28=1295.20
after tax from CD= 5100-474.30-1295.2 = 3330.5>>>

<<Don't you deduct your California taxes on your Federal return? If so that would mean you have an additional 474.30*.28=132.80>>

Not if AMT applies. There's no deduction for taxes for AMT purposes. And I noted that the federal rate quoted, 28%, is the upper AMT rate.


Just because 28% is the upper AMT rate doesn't mean that the interest was taxed at 28%. It was taxed at your marginal income tax rate which could be higher than 28% (for example 33%). The 28% AMT rate can be looked at as a "recapture" (in the form of a higher tax rate) of the portion of your income that was taxed at the lower tax brackets of 0%, 10%, 15%, and 25%. Due to the complexity of our tax system, and the interactions of AMT, the best, and perhaps only, way to determine your true marginal rate on the additional interest is to calculate tax without it, and then with it, and take the difference to calculate your true marginal rate in that case.



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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: 19463 of 35363
Subject: Re: on the fence Date: 1/19/2007 3:27 PM
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CD interest = 5100
CA tax on interest = 5100*.093 = 474.30
US tax on interest = (5100-474.3)*.28=1295.20
after tax from CD= 5100-474.30-1295.2 = 3330.5


Don't you deduct your California taxes on your Federal return? If so that would mean you have an additional 474.30*.28=132.80

That's what I was trying to do in the third line there. $5100 interest - 474.30 CA tax, the remainder taxed at 28%.

Did I do it wrong?

Vickifool--often wrong

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Author: jrr7 Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19465 of 35363
Subject: Re: on the fence Date: 1/19/2007 3:49 PM
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Oopsie -- didn't see the 474.3 there on the "US Tax" line.

I think the deduction of the CA tax should be on a separate line than the US tax on the interest -- if you wanted to bring time value into things then you'd need to have the amount separately.

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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: 19466 of 35363
Subject: Re: on the fence Date: 1/19/2007 3:52 PM
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There's no deduction for taxes for AMT purposes. And I noted that the federal rate quoted, 28%, is the upper AMT rate.


I decided to leave AMT out of my explanation because it was getting too long. You are right that state taxes are not deductible for AMT. We have often had to pay AMT because CA taxes are so high.

I don't think markr33 understands AMT. http://boards.fool.com/Message.asp?mid=25059979

Vickifool

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Author: markr33 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19479 of 35363
Subject: Re: on the fence Date: 1/20/2007 7:46 PM
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I don't think markr33 understands AMT.

I don't think anyone really understands it! It is very confusing especially when coupled with the various phaseouts that occur in the same ranges of income/deductions.


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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: 19487 of 35363
Subject: Re: on the fence Date: 1/21/2007 10:37 AM
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I don't think markr33 understands AMT.
-------
I don't think anyone really understands it! It is very confusing especially when coupled with the various phaseouts that occur in the same ranges of income/deductions.


Good point. Have a rec! LOL

Vickifool

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Author: stratton2 Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19488 of 35363
Subject: Re: on the fence Date: 1/21/2007 3:27 PM
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...AMT.

I don't think anyone really understands it! It is very confusing especially when coupled with the various phaseouts that occur in the same ranges of income/deductions.

I just tripped over this the other day in Borders:

Alternative Minimum Tax: What You Need To Know About the "Other" Tax

by Harold S. Peckron

http://www.amazon.com/Alternative-Minimum-Tax-About-Other/dp/1572484608/sr=8-1/qid=1169410998/ref=pd_bbs_1/104-6682089-0492712?ie=UTF8&s=books

It's pretty short for reference book, but since it only covers the AMT its pretty detailed. Lots of examples.

Paul

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