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.

INVESTOPEDIA EXPLAINS '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. Capital Loss

    The loss incurred when a capital asset (investment or real estate) ...
  3. Estate Tax

    A tax levied on an heir's inherited portion of an estate if the ...
  4. Cost Basis

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

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

    The total expected dividend payments from an investment, fund ...
Related Articles
  1. Dividend Facts You May Not Know
    Investing Basics

    Dividend Facts You May Not Know

  2. Avoiding Too Much Tax On Your Distributions
    Retirement

    Avoiding Too Much Tax On Your Distributions

  3. Will Your Home Sale Leave You With Tax ...
    Taxes

    Will Your Home Sale Leave You With Tax ...

  4. Using Tax Lots: A Way To Minimize Taxes
    Taxes

    Using Tax Lots: A Way To Minimize Taxes

Hot Definitions
  1. Leading Indicator

    A measurable economic factor that changes before the economy starts to follow a particular pattern or trend. Leading indicators ...
  2. Wage-Price Spiral

    A macroeconomic theory to explain the cause-and-effect relationship between rising wages and rising prices, or inflation. ...
  3. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax purposes that allows greater deductions in the earlier years ...
  4. Call Risk

    The risk, faced by a holder of a callable bond, that a bond issuer will take advantage of the callable bond feature and redeem ...
  5. Parity Price

    When the price of an asset is directly linked to another price. Examples of parity price are: 1. Convertibles - the price ...
  6. Earnings Multiplier

    An adjustment made to a company's P/E ratio that takes into account current interest rates. The earnings multiplier is used ...
Trading Center