Taxes paid on her federal income tax return

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Tammy, a resident of Virginia, is considering whether to purchase a North Carolina bond that yields 4.6% before tax. She is in the 35% Federal marginal tax bracket and the 5% state marginal tax bracket. Tammy is aware that State of Virginia bonds of comparable risk are yielding 4.5%. Virginia bonds are exempt from Virginia tax, but the North Carolina bond interest is taxable in Virginia. Which of the two options will provide the greater after-tax return to Tammy? Tammy can deduct all state taxes paid on her Federal income tax return.

Reference no: EM131811706

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