What Is an After-Tax Basis?

An after-tax basis is used to compare the net after-tax returns on taxable and tax-exempt bonds to gauge which has a higher yield.

Understanding After-Tax Bases

Taxable bonds, such as 澳洲幸运5官方开奖结果体彩网:corporate bonds, may offer higher returns than tax-exempt bonds, such as 澳洲幸运5官方开奖结果体彩网:municipal bonds. Calculating the after-tax basis will allow an investor to make a better decision that will maximize their 澳洲幸运5官方开奖结果体彩网:portfolio's return.

Most corporate bonds may state a higher yield than their tax-exempt cousins, given that the investor has to take on additional risk. While an investor might be willing to take on that added risk, they will want to ensure that the after-tax basis is higher than, say, a comparable municipal bond. To compare the 澳洲幸运5官方开奖结果体彩网:return on investment (ROI) of the two products accurately they must first calculate the amount of tax on the corporate bond earning🐟s stream. Taxes are deducted from earnings to give the actual yield. Then, and only then, can an investor compare the returns of the taxable bond and the tax-exempt bond.

Depending on the circumstances of the bond’s 澳洲幸运5官方开奖结果体彩网:redemption, calculating how much a bondholder will pay in tax may require the assistance of a financial or tax professional. An after-tax basis comparison can be tricky to figure. This difficulty lies in the different methodologies that are used when calculating the tax on corporate bonds. Generally speaking:

• All corporate bonds will be taxed, both at the state and federal level, based on the interest earnings.
• If redemption happens before maturity, the profits may be subject to 澳洲幸运5官方开奖结果体彩网:capital gains tax. 
• Some bonds do not pay interest on coupons but are merely redeemable for their face value at maturity. Investors purchase 澳洲幸运5官方开奖结果体彩网:no-coupon bonds at a discount and the difference between the bond’s purchase price and its redemption value at maturity is subject to taxes. 

Considerations Besides After-Tax Bases

Calculating t꧃he after-tax yield on a corp♏orate bond can allow you to compare it to the return on a tax-exempt bond. However, that comparison does not take into account all of the factors that determine whether a taxable or a tax-exempt bond is a better investment. 

For example, many people opt for municipal bonds because they have an extremely low 澳洲幸运5官方开奖结果体彩网:default risk, which makes&n🉐bsp;them a much safer investment vehicle. Corporate bonds, on the other hand, may come with a higher degree of risk. Some may offer very high yields, but that higher yield likely correlates directly to a higher risk. 

Credit rating agencies such as Moody’s can provide potential investors with information about how creditworthy a company is and what an investor can expect. Some corporate bonds are also callable, meaning that the issuing company can call away the obligations for redemption before they mature. Investors receive a predetermined amount based on when the bonds are called, but must then go into the open marketplace to reinꦜvest these funds. Often they will not be able to get the same returns as the original investment provided.