Let’s assume you’re in the 28 percent federal income tax bracket and are considering a 5.75 percent tax-exempt bond fund. In order to see how this 5.75 percent yield compares with the after-tax yield of a similar taxable fund, you simply divide the yield (5.75 percent) by 0.72 (1 less 0.28). The result is 7.99 percent. If an equivalent taxable bond fund is yielding more than 7.99 percent, it’s the better buy; if under 7.99 percent, the tax-exempt fund is probably the better choice.
