2.. What would be the after-tax value of $100 earned in interest for a person who is in a 31 percent tax bracket? $ _____ The taxability of interest on your savings reduces your real rate of return. In other words, you lose some portion of your interest to taxes. This calculation consists of the following steps:
1. Determine your top tax bracket for federal income taxes.
2. Subtract this rate, expressed as a decimal, from 1.0.
3. Multiply the result by the yield on your savings account.
4. This number, expressed as a percentage, is your after-tax rate of return.
For example, 1. You are in the 28 percent tax bracket.
2. 1.0 – 0.28 = 0.72.
3. If the yield on your savings account is 6.25 percent, 0.0625 × 0.72 = 0.045.
4. Your after-tax rate of return is 4.5 percent.
You may use the same procedure to determine the real rate of return on your savings based on inflation. For example, if you are earning 6 percent on savings and inflation is 5 percent, your real rate of return (after inflation) is 5.7 percent: 0.06 × (1 – 0.05) = 0.057.