Taxes are Going to be Hiked higher than a Pair of Tights One Size too Small

In America everyone likes to consider themselves middle class but the fact of the matter is 2 peoples' incomes can vary in the hundreds of thousands and both will declare themselves in the middle. I'm not concerned with changing peoples ideas of where they fit in our economical scale, but more with informing them what type of bond would be the best investment for their tax bracket. While taxes already eat a big chunk of our paychecks, that meal is about to get supersized. Now that our economy is not spiraling out of control, we are going to have to pay for our nice little bailout package that helped put the breaks on. And the way we're going to pay for it is through our taxes being raised, by a lot. Most people don't even know what tax bracket they're currently in and your tax bracket is probably a lot higher than you think. I wish I had better news, but it's only going up. Just to give you an idea, in 2009 a single person who makes $34,000 a year is already in the 25% federal bracket. That doesn't even take into account people who live in states and cities that have additional taxes (most states do). The higher a person's bracket is, the more sense it makes for him or her to invest in tax free bonds. Once your paycheck is already taxed at that high rate, you don't want your investment income to be taxed there too!

A general rule of thumb to go by is if your bracket is 25% or above, you should be looking for tax free bonds. If you live in a state such as NY, CA, MA, MD or MN that have higher state income taxes, you should really stick to buying tax free bonds within the state you live in to get the added bonus of your investment income not being subject to state tax. Just as an example, if you buy a 5% tax free bond and are a NY resident in the 25% bracket, if you buy a NY bond, that's another 6.85% you avoid having to pay on your interest. To get your taxable equivalent, you add your state and federal bracket, subtract it from 100 and then divide that number into the yield you bought the bond at. (25% + 6.85%= 31.85%, 100-31.85=68.15, and 5/68.15=7.34%) Basically you would have to get a taxable investment yielding a 7.34% to equal your net income on a tax free 5% bond.

If your bracket is below 25% (right now less than 34k a year) you should be buying taxable bonds. While many people buy corporate bonds as taxable investments because we want to support our favorite companies, we've all seen what has happened to a lot of corporations in the past year. Once upon a time bond holders had first claim to the company's assets when it went under, now with all these different type of bankruptcies bond holders end up getting screwed. To be safe, and still get a higher yield you should look for taxable municipal bonds. These bonds have the safety of a municipal bond with the yield of a taxable entity, if you're in a bracket lower than 25%, these bonds are great! To get your post tax yield multiply your bracket by the yield you're getting and then subtract that number from your bond yield. For example if your taxable bond yields 6% and you're in the 15% bracket, to get your true yield you 15%*6%= .9 then 6-.9 = 5.1%

Basically, while we're all in the middle class, we're not all in the same tax bracket so get out there, try on some bonds and see what fits!