Breakeven Tax Rate
Categories: Tax, Accounting, Company Management
The amount of taxes to be paid (on a percentage basis) that would result in a neutral financial impact from a transaction.
Clair is thinking about investing in either Disney bonds with a coupon rate of 10%...or bonds issued by the city of Orlando that pay 8%.
As a Florida resident, she pays no state income tax, and income from municipal bonds is exempt from federal income tax, so Clair’s breakeven tax rate is 20% when comparing the two investments.
If she pays more than 20% in federal taxes, her net interest income from the Disney bond will be less than that of the Orlando bond, and vice versa.