Update on T-Bill Taxable Equivalent Yield
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Yesterday, a reader, goldsheet (Thanks!), posted a comment on my T-Bill Taxable Equivalent Yield, saying that the EAPY formula in the post is actually for itemized deduction and he/she also provided a formula for EAPY for standard deduction.
Indeed, the formula I gave is only for the calculation of EAPY if you itemize, which I automatically assumed that everybody will. If you don't, the formula to get your EAPY is
EAPY = APY*(1 - Federal tax rate)/(1 - Federal tax rate - State tax rate)
As for me, with a 25% federal tax rate and 6.37% state tax rate, my EAPY is
EAPY = 0.05302*(1 - 0.25)/(1 - 0.25 - 0.0637) = 5.79%
I don't think I can get a rate from any bank that's close to 5.79%! Plus, since interests earned from banks are taxed at both the federal and state level, the rate you actually get will be lowered and the gap between interests from T-bill and banks will be even wider.
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Yup, as non-itemizers living in California (we’re renters and not homeowners), T-bills are certainly attractive. I still have to remind myself though that tax-effective yield is not the same thing as the “actual yield”. In other words, that ~6% effective rate is for comparison purposes only, and at the end of the year, I’m actually making less than that (and even more less if I’d chosen a taxable vehicle). An equivalent and more accurate comparison method would be to compare investment vehicles with all applicable taxes included, but it’s easier to do it the other way.
That was horrible grammar … “even more less”. Ugh. I meant that I’d be getting even less in return if I’d chosen an investment vehicle that was subject to state income taxes.
That’s ture. The equivalent yield is kind of a theoretical number because every week there will be a different rate and for every T-bill purchase, the rate is locked for four weeks. If the purchase is made every week, then there will be 54 rates through out the year, the calculation will be quite tedious.