Question

2. Ms. Drake is deciding between investing $50,000 in two different municipal bonds, both of which have the same risk. The first option is state of Colorado bonds paying interest of 3.35%. The second option is state of Texas bonds paying interest of 3.50%. All income from either bond investment is nontaxable at the federal level. Because Ms. Drake is a resident of Colorado, any income from the Colorado bond is nontaxable at the state level as well. However, any income from the Texas bond would be taxable in Colorado at Ms. Drake's state tax rate of 4.63%. Additionally, any state income taxes paid to Colorado on the Texas bond income would be deductible on Ms. Drake's federal tax return, benefiting her at her federal tax rate of 35%. Considering all of the above facts, which bond investment offers Ms. Drake the greater post-tax return - and by how much? Support your answer with clearly labeled calculations. Below is how far I have gotten: Colorado Bond: Interest Income: $50,000 * 3.35%= $1,675 Texas Bond: Interest Income: Interest Income: $50,000 * 3.50% = $1,750 State tax: $1,750 * 4.63% = $81 $1,750 - 81 = $1,669 Benefit of federal tax rate: Benefit of federal tax rate: ?

Answer 1

Texas bond offers Better return to Ms. Drake by $ 6.00 ( $ 1669- $1675 ) for every $50,000 invested . Pre tax income In case of Texas bond is $1750.00 and after deducting tax @4.63% its post tax interest income is $1669 which is higher than that of Colorado bond . calculation are shown in picture attached alongwith.

→ Ms. Drake resident of wolorado → federal Tax rate 35% Any Income from Texas toxable at 4.63% and benefit on that income given from federal tax. options for Ms. Drake - Punciple $50,000 Colorado bond Texas boud interest = 3.35% Interest = 3.50% Tax = 0% Tox@ 4.63.7. Colorado boud Texas bond principle = $ 50,000 Texas Principle = $50,000 Interest= 50000 x 3.35%. = $1675 Interest = 50000 x 3.50% = $1750 (-) Tax = $(81) @4.63% Net Income = $1669 I Net Income