After-Tax Basis

AAA

DEFINITION of 'After-Tax Basis'

A comparison of the net yields produced by taxable and tax-exempt bonds. After-tax basis is most often used when comparing between bonds used to finance private business endeavors (corporate bonds) and bonds used to finance public projects (tax-free municipal bonds). Because one must pay taxes on income derived from corporate bonds, the yield on those bonds is necessarily less than the stated interest rate, whereas tax-exempt municipal bonds can be evaluated at face value.

BREAKING DOWN 'After-Tax Basis'

While the after-tax basis evaluation of taxable and tax-exempt bonds would seem to be very straightforward, it's important to remember that the amount of tax one pays can be a function of one's income, as well as the performance of his/her other holdings.

For example, an investor in a 35% tax bracket receives what amounts to 6.5% interest on a corporate bond with a 10% yield, whereas an investor in a 15% tax bracket, receives 8.5%. Similarly, an investor with market losses to totally or partially offset his/her market gains, will likewise realize more of the listed yield on a corporate bond than an investor with no such losses.

RELATED TERMS
  1. Underwithholding

    Inadequate withholding of taxes from wages or other income during ...
  2. Estate Tax

    A tax levied on an heir's inherited portion of an estate if the ...
  3. Gain

    An increase in the value of an asset or property. A gain arises ...
  4. Capital Loss

    The loss incurred when a capital asset (investment or real estate) ...
  5. Cost Basis

    1. The original value of an asset for tax purposes (usually the ...
  6. Dividend Rate

    The total expected dividend payments from an investment, fund ...
Related Articles
  1. Investing Basics

    Dividend Facts You May Not Know

    Discover the issues that complicate these payouts for investors.
  2. Retirement

    Avoiding Too Much Tax On Your Distributions

    IRA assets can't be taxed twice - find out how to avoid paying the second time around.
  3. Taxes

    Will Your Home Sale Leave You With Tax Shock?

    Learn how the newest tax laws apply to the proceeds you earn.
  4. Taxes

    Using Tax Lots: A Way To Minimize Taxes

    The method of identifying cost basis can help you to get the most out of reduced tax rates.
  5. Taxes

    Taxation Rules For Bond Investors

    Several factors affect the taxable interest that must be reported. Learn more here.
  6. Taxes

    Avoid Capital Gains Tax On Your Home Sale

    If you have property to sell and want to avoid capital gains tax, a Section 1031 exchange may be the answer.
  7. Mutual Funds & ETFs

    ETF Analysis: Guggenheim Enhanced Short Dur

    Find out about the Guggenheim Enhanced Short Duration ETF, and learn detailed information about this fund that focuses on fixed-income securities.
  8. Mutual Funds & ETFs

    ETF Analysis: Guggenheim BulletShrs 2018 HY CorpBd

    Find out about the Guggenheim BulletShares 2018 High Yield Corporate Bond ETF, and get information about this ETF that focuses on high-yield corporate bonds.
  9. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  10. Mutual Funds & ETFs

    ETF Analysis: Market Vectors EM High Yield Bd

    Learn more about the Market Vectors Emerging Markets High Yield Bond ETF, a fund dedicated to subinvestment grade foreign debt issues.
RELATED FAQS
  1. How do I calculate my gains and/or losses when I sell a stock?

    To begin, you need to know your cost basis, or the price you paid for the stock. If you did not record this information, ... Read Full Answer >>
  2. What are the maximum Social Security disability benefits?

    The maximum Social Security disability benefit amount for a single eligible person in 2015 is $1,165 per month, but you can ... Read Full Answer >>
  3. What is the relationship between the current yield and risk?

    The general relationship between current yield and risk is that they increase in correlation to one another. A higher current ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. What is a 'busted' convertible bond?

    In finance, a convertible bond represents a hybrid security that offers debt and equity features and risks. While a convertible ... Read Full Answer >>
  6. Who or what is backing municipal bonds?

    Municipal bonds are backed by dedicated taxes or revenue sources related to specific projects, or by the full faith and credit ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Bear Market

    A market condition in which the prices of securities are falling, and widespread pessimism causes the negative sentiment ...
  2. Alligator Spread

    An unprofitable spread that occurs as a result of large commissions charged on the transaction, regardless of favorable market ...
  3. Tiger Cub Economies

    The four Southeast Asian economies of Indonesia, Malaysia, the Philippines and Thailand. Tiger cub economy indicates that ...
  4. Gorilla

    A company that dominates an industry without having a complete monopoly. A gorilla firm has large control of the pricing ...
  5. Elephants

    Slang for large institutions that have the funds to make high volumes trades. Due to the large volumes of stock that elephants ...
  6. Widow's Exemption

    In general terms, a widow's exemption refers to the amount that can be deducted from taxable income by a widow, thereby reducing ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!