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Your federal tax return.

April 18, 2011
Jonathan Clements, Director of Financial Education, Citi Personal Wealth Management

With any luck, you met the April 18 tax-filing deadline. But what did you learn? Here are three key financial insights you can garner from your federal tax return.

First, look at Schedule D and see how many trades you made, especially trades that resulted in short-term capital gains. Those short-term gains are taxable at ordinary income-tax rates, which could be as high as 35%. What to do? This year, assuming it makes investment sense, you might try to hang onto your winners for more than 12 months, so they're taxed at the long-term capital-gains rate, which is a maximum 15%. You might also limit your trading to retirement accounts, like your 401(k) plan or Individual Retirement Account, where you don't have to pay taxes until money is withdrawn.

Second, see whether you itemized your deductions using Schedule A or took the standard deduction, which in 2011 is $11,600 for married couples and $5,800 for single individuals. If you took the standard deduction, you aren't getting a tax benefit from your various deductions. One implication: You can't deduct any mortgage interest you're paying--and thus it could make sense to pay off your home loan.

Finally, figure out what your marginal federal income-tax rate is, which is the rate at which your last dollar of income was taxed. Your tax preparer should be able to tell you--or, if you're using tax software, you might try temporarily adding $100 to your income and see what it does to your overall tax bill.

If you know your marginal tax rate, it can help you choose between municipal and taxable bonds. Let's say you are in the 28% federal income-tax bracket and you own some munis yielding 3%. To see if taxable bonds might be a better option, you need to calculate your tax-equivalent yield, which tells you how much a taxable bond would have to yield to give you at least as much after-tax income.

To get this number, take the 3% yield on your munis and divide it by 1 minus your marginal federal rate. Because you are in the 28% bracket, that would mean dividing your munis' 3% yield by 0.72, equal to 1 minus 0.28. (Assuming the munis are tax-free at the state level, you would also need to adjust for your marginal state income-tax rate.) Result: If you remain in the 28% tax bracket, to give you the same after-tax income as your munis, a taxable bond would generally need to yield 4.17%.

INVESTMENT PRODUCTS: NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE

The information provided is solely for informational purposes. It is not an offer to buy or sell any of the securities, insurance products, investments, or other products named.

Citigroup Inc. and its affiliates do not provide tax or legal advice. To the extent that this material or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Any such taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor.

Municipal Bonds may be subject to state and local taxes and you may also be subject to Alternative Minimum Tax (AMT). Official offerings may be made only by the final Official Statement. If sold prior to maturity you may receive more or less than your original investment. Past performance is not a guarantee of future results.

Bonds are affected by a number of risks, including fluctuations in interest rates, credit risk and prepayment risk.

© 2011 Citigroup Inc. Citi Personal Wealth Management is a business of Citigroup Inc., which offers securities through Citigroup Global Markets Inc. ("CGMI"), member SIPC. Citibank, N.A. and CGMI are affiliated companies under the common control of Citigroup Inc. Citi and Citi with Arc Design are registered service marks of Citigroup Inc. or its affiliates, and are used and registered throughout the world.

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