ammy, a resident of Virginia, is considering purchasing a $100,000 North Carolin

Question

ammy, a resident of Virginia, is considering purchasing a $100,000 North Carolina bond that yields 4.6% before tax. She is in the 35% Federal marginal tax bracket and the 5% state marginal tax bracket. She is aware that State of Virginia bonds of comparable risk are yielding 4.5%. However, the Virginia bonds are exempt from Virginia tax, but the North Carolina bond interest is taxable in Virginia. Tammy can deduct any state taxes paid on her Federal income tax return. In your analysis, assume the bond amount is $100,000. If required, round your computations and answers to the nearest dollar. Determine the after tax income from each bond. Virginia Bond: $ North Carolina Bond: $

Explanation / Answer

Solution:

After tax income from virgina bond = $100,000 * 4.50% =$4,500

After tax income on carolina bond:

Interest income = $100,000 * 4.6% = $4,600

State tax = $4,600 * 5% = $230

Tax saving of federal tax = $230 * 35% = $81

After tax income from North Carolina bond = $4,600 - $230 + $81 = $4,451

Therefore Virgina bond yield the greatest after tax income.

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