Tammy, a resident of Virginia, is considering whether to purchase a North Carolina bond, face amount $100,000, that yields 4.6% before tax. She is in me 35% Federal marginal tax bracket and me 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.