Triple-Tax-Free

  

Categories: Muni Bonds

Spin the screen, enter that weird movie DISSOLVE thing, and we're placing you in an apartment on 5th and 72nd in Manhattan. Yeah, nice address. The Park is right there. You can almost hear the muggers mugging right outside your window.

For the privilege of living there, you pay a Manhattan City Tax. You also pay State Tax. And you pay Federal Taxes. So if you're a drug dealer doing only business in cash, then it's likely you're living a triple-tax-free life.

Yes, illegal. But even legally, there are times where you've invested in a triple-tax-free muni bond. So if you're paying 39.6% Federal and 12% State and 3% city tax, i.e. meaningfully over 50% tax, and a muni bond comes along paying 4% interest, then that's the equivalent of 8% pre-tax...so you do it.

Triple-tax-free. Triply happy for investors.

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Finance: Who buys muni bonds?1 Views

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Finance allah shmoop who buys communi bonds who buys them

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rich people or rather people earning enough active income such

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that their marginal tax rates are very high Munich bonds

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are tax free so in practice they tend to offer

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lower net yields than taxable corporate bonds Okay so what's

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the math here Well if your ah high earner i'ii

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europe bo tox correction surgeon or an ambulance chasing attorney

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from new york Or an all star nfl linebacker with

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no felony drug or spousal battery convictions Yeah a few

00:35

of those actually do exist Well then it's likely that

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you pay the highest marginal tax rates They seem to

00:41

change every election cycle so will generalize here so we

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don't have to redo this video every two to four

00:47

years At the highest rates you'll pay about thirty five

00:49

percent federal tax and twelve ish percent state tax and

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usually an override for some other political initiative like obama

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care or the wall fund or the no child left

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behind fund at the zune fund Beyond those total them

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up And let's say you pay fifty percent marginal tax

01:06

on your last in a few million bucks in earnings

01:08

and let's also say for illustrative purposes here assumed that

01:13

the bonds we are comparing our of equivalent risk and

01:16

duration compared with these immunities right Let's say so They're

01:19

both a rated and they come due in on a

01:21

half a dozen years Well the corporate bonds than yield

01:25

us a seven point two percent and the parallel nooni

01:28

bond yields four percent So then which bond has the

01:31

higher value to its high tax paying owner Well if

01:35

you're paying fifty percent tax on the seven point two

01:38

percent corporate bond than you the nun convicted linebacker pay

01:42

net after tax fifty percent of seven point two percent

01:45

interest or three point six percent The munich carries no

01:48

tax so it's gross is net meaning the four percent

01:52

yield of them unibond produces point four percent a year

01:55

Better yield after taxes then does the corporate bond So

01:59

what if you were a sir school teacher not rich

02:01

paying this a twenty percent marginal tax instead of fifty

02:05

Well then you'd go for the corporate bond It yields

02:08

gross seven point two percent But after your twenty percent

02:11

tax the yield after tax on that corporate to you

02:14

mrs whitehead homeroom number fourteen teacher of health and sex

02:18

ed to simply horny teams Yes your yield then is

02:21

point eight times seven point two or five point seven

02:25

six percent way higher than the muniz yield of four

02:28

percent The differences here in yield from a corporate versus

02:31

immune e maybe don't seem like a lot but over

02:33

time they really add up So once you make your

02:36

first one hundred million or so don't forget teo you

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know come back and watch this video It'll be here 00:02:41.48 --> [endTime] for you

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Finance: What is a Muni Bond?
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