After-Tax Basis


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.

  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. Capital Loss

    The loss incurred when a capital asset (investment or real estate) ...
  4. Gain

    An increase in the value of an asset or property. A gain arises ...
  5. Dividend Rate

    The total expected dividend payments from an investment, fund ...
  6. Cost Basis

    1. The original value of an asset for tax purposes (usually the ...
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. Professionals

    Common Interview Questions for Fixed Income Traders

    Discover a list of potential questions and answers commonly asked in job interviews for a candidate applying for a position as a fixed-income trader.
  8. Investing

    In Search of the Rate-Proof Portfolio

    After October’s better-than-expected employment report, a December Federal Reserve (Fed) liftoff is looking more likely than it was earlier this fall.
  9. Investing

    Where the Price is Right for Dividends

    There are two broad schools of thought for equity income investing: The first pays the highest dividend yields and the second focuses on healthy yields.
  10. Investing

    The Pros and Cons of High-Yield Bonds

    Junk bonds are more volatile than investment-grade bonds but may provide significant advantages when analyzed in-depth.
  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 average Social Security disability benefit amount for a recipient of Social Security Disability Insurance (SSDI) in 2 ... Read Full Answer >>
  3. How do I calculate the future value of an annuity?

    When planning for retirement, it is important to have a good idea of how much income you can rely on each year. There are ... Read Full Answer >>
  4. Have hedge funds eroded market opportunities?

    Hedge funds have not eroded market opportunities for longer-term investors. Many investors incorrectly assume they cannot ... Read Full Answer >>
  5. Are high yield bonds a good investment?

    Bonds are rated according to their risk of default by independent credit rating agencies such as Moody's, Standard & ... Read Full Answer >>
  6. Do mutual funds invest only in stocks?

    Mutual funds invest in stocks, but certain types also invest in government and corporate bonds. Stocks are subject to the ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Cyber Monday

    An expression used in online retailing to describe the Monday following U.S. Thanksgiving weekend. Cyber Monday is generally ...
  2. Bar Chart

    A style of chart used by some technical analysts, on which, as illustrated below, the top of the vertical line indicates ...
  3. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  4. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  5. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  6. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
Trading Center