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# Computing After-tax Returns

Mr. Smith is in the 30% tax bracket. He earns \$50,000 per year.

What is his tax bracket after-tax income? 50000 x 0.60 = (1-0.40 = 0.60)

50000 x 0.60 = 30000.00

Mr. Smith has two investment opportunities:

a. Megacorp, a for-profit healthcare company offering a bond at 8%
b. Good Neighborcare, a not for profit healthcare compay offer a tax exempt bond at 5%.

Which investment will yielf the greatest after tax financial return?

0.08 x \$100 = \$8

\$8 x (1 - 40

What is the rate for Good Neighborcare bond that would give Mr. Smith the same after tax return as Megacorp bond?

#### Solution Preview

Mr. Smith is in the 30% tax bracket. He earns \$50,000 per year.

What is his tax bracket after-tax income?

The \$50,000 is subject to income tax, so he will pay 30 percent of the \$50,000 in income taxes and keep the rest.

After-tax income=before-tax income*(1-tax rate)
After-tax income=\$50,000*(1-.30)
After-tax income=\$50,000*.70
After-tax income=\$35,000

Mr. Smith has two investment opportunities:

a. Megacorp, a for-profit healthcare company ...

#### Solution Summary

Given a person's gross income, this solution illustrates how to compute his after-tax income. Then, given a taxable bond and tax-free bond, the solution illustrates how to compute the after-tax returns of both.

\$2.19