(MONEY Magazine) – With 43 states and more than 700 cities and counties imposing income taxes on top of the federal government's take, it's more important than ever to know your total combined tax bracket. Then you can figure out whether you'd be better off with tax-free or taxable investments. The calculation is easy if you don't itemize on your federal return -- just add your federal, state and local brackets. But if you itemize, you must factor in the value of the federal deduction for state and local taxes. Here's how (for simplicity, we've converted tax rates to decimals): STEP 1. Combine your state and local tax brackets. If you don't know them, ask your tax preparer or call the taxpayer assistance number listed in your state tax return booklet. STEP 2. Multiply the answer in Step 1 by the net amount of 1 minus your federal tax bracket. You can get your 1990 federal bracket by calling the IRS at 800-424-1040 and providing an estimate of your taxable income this year. STEP 3. Add the result in Step 2 to your federal tax bracket. For example, a top-bracket taxpayer in Detroit is burdened with a 4.6% state bracket, a 3% city bracket and a 33% federal bracket. That works out to a combined state and local bracket of 5.09%, figured as follows: (0.046 + 0.03) x (1 - 0.33). His total bracket, including federal taxes, is 38.09% (0.0509 + 0.33). Let's say the taxpayer is choosing between the Fidelity Michigan Tax-Free Money Market Portfolio (recent yield: 6.01%) and Fidelity's taxable Cash Reserves money-market fund (yield: 7.68%). Knowing his total bracket (38.09%), he can quickly determine which fund will pay him the higher return by dividing the tax-free fund's yield (0.0601) by 0.6191, which is 1 minus his combined bracket of 0.3809. The result is a taxable-equivalent yield of 9.71% (or 0.0971) -- far better than the 7.68% taxable fund's yield. Warning: if you write off federal income taxes on your state return as is allowed in 11 states*, the formula will be slightly off. Ask your tax preparer for help.

FOOTNOTE: *Alabama, Arizona, Iowa, Kansas, Louisiana, Missouri, Montana, North Dakota, Oklahoma, Oregon and Utah