# Calculating tax-equivalent yields

### Personal finance, T-bills

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While I was out of the country, I wasn’t able to follow up on . Now that I’m back, it seems that recent . As a California resident though, these rates are still attractive in comparison to high-yield savings accounts and rates on CDs because T-bills are exempt from state income tax. For most people in California, including us, that represents a whopping 9.3% of our income.

Assuming a conservative 25% federal tax bracket, even the current 28-day yield of 4.86% APY (September 14, 2006 issue date) gives a tax-equivalent yield of 5.55%, which is higher than what I’m getting in my money market fund, CDs, or what’s being offered in high-yield savings accounts, all of which are subject to state income taxes.

The 6-month T-bill APY of (5.2% unadjusted, 5.94% under the same assumptions above) is even more attractive, and I’ll have to decide by the end of the week if I want to go ahead and put some money in the 182-day auction coming up next Monday, or play a bit more wait-and-see-what-the-Fed-signals before buying in. If you’re interested in learning more, there’s a .

Just to refresh your memory, the equations for calculating tax-equivalent yields are the following:

If itemizing (deducting) state income taxes from federal income taxes:

Equivalent APY = T-bill APY / (1 – state income tax rate)

If taking the standard deduction:

Equivalent APY = T-bill APY * (1 – federal income tax rate)/(1 – federal income tax rate – state income tax rate)

I’ve just added a simple javascript-based under the online calculators section of this site.

So if you live in a state with state income tax, T-bills may still be worth your consideration. I feel I still need to catch up on what’s been happening recently before I can decide on when and what to T-bill to purchase (it’s amazing how being gone 2-3 weeks can throw a wrench into your entire schedule), but I’ll be sure to write updates here on any decisions I make.

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### The Finance Journey » Posts Of The Week

[…] Experiments in Finance shows you how the art of Calculating Tax-Equivalent Yields (especially good for T-Bills). Share This Post:These icons link to social bookmarking sites where readers can share and discover new web pages. […]

### Schwab makes it easy to buy treasuries at auction | Experiments in Finance

[…] Last week, I started looking at buying treasuries again. T-bill yields had dipped in September but rebounded strongly and were certainly well worth the consideration of anyone who lived in a state with state income tax. (I’ve previously written about how to calculate tax-equivalent yields and provided an online calculator to do so, as well as about using Treasury Direct to buy treasuries, if you’re looking for some background information.) […]