Tax Equivalent Yield Calculator
Compare a tax-exempt yield with a taxable investment after applying your marginal tax rate. The calculator finds the taxable-equivalent yield, break-even tax rate and annual interest amounts.
Tax-equivalent yield results
| Scenario | Gross yield | After-tax yield | Gross interest | Modeled tax | After-tax interest |
|---|
Tax equivalent yield formula
Taxable-equivalent yield answers this question: what gross yield would a fully taxable investment need to earn to match the entered tax-exempt yield after tax?
Taxable-equivalent yield = tax-exempt yield ÷ (1 − marginal tax rate)
Enter percentages as percentages. A 3.5% tax-exempt yield and a 32% marginal tax rate produce 3.5% ÷ (1 − 0.32) = 5.1471%.
For a taxable investment, after-tax yield = taxable yield × (1 − marginal tax rate). When a taxable comparison yield is supplied, the break-even marginal tax rate is 1 − tax-exempt yield ÷ taxable yield.
Verified examples
| Inputs | Result |
|---|---|
| US$100,000; 3.5% tax-exempt yield; 32% tax rate; 5% taxable yield | Taxable-equivalent yield 5.1471%; taxable after-tax yield 3.4%; tax-exempt advantage 0.1 percentage point or US$100 per year; break-even tax rate 30% |
| US$50,000; 4% tax-exempt yield; 24% tax rate; 5.5% taxable yield | Taxable-equivalent yield 5.2632%; taxable after-tax yield 4.18%; taxable advantage 0.18 percentage point or US$90 per year; break-even tax rate 27.2727% |
| US$25,000; 3% tax-exempt yield; 0% tax rate; 3% taxable yield | Both yields equal 3%; both produce US$750 per year and the taxable-equivalent yield remains 3% |
How to use the comparison
If the comparable taxable yield is below the taxable-equivalent yield, the tax-exempt investment has the higher modeled after-tax yield. If it is above the equivalent yield, the taxable investment has the higher modeled after-tax yield. At equality, both produce the same after-tax income under the entered assumptions.
The break-even tax rate is useful when comparing a known tax-exempt yield with a known taxable yield. If your applicable marginal rate is above that break-even rate, the tax-exempt yield is generally higher after tax; if it is below, the taxable yield is generally higher after tax.
Limits and assumptions
- The investment amount must be greater than zero and cannot exceed 1,000,000,000,000 monetary units. It accepts up to two decimal places.
- Yields must be from 0% through 100%. The marginal tax rate must be from 0% through 99.99%. Percentage inputs accept up to four decimal places.
- The tax-exempt yield input is treated as the yield after any tax that still applies to that investment. Do not enter a fully tax-free yield when state, local, federal or other tax actually remains due.
- The marginal tax rate is an input, not a tax-bracket lookup. It should reflect the combined effective marginal rate applicable to the taxable interest being compared.
- The model does not determine federal, state or local exemptions; residency rules; alternative minimum tax; net investment income tax; deductions; credits; phaseouts; filing status; or bond-specific tax treatment.
- Credit risk, duration, call risk, liquidity, price changes, fees and reinvestment are not modeled. A higher after-tax yield alone does not make an investment suitable.
- Results are educational estimates, not tax, legal or investment advice.
Confirm the tax treatment of a municipal bond or other tax-exempt investment and the marginal rate that applies to the taxable alternative before acting on this comparison.
Frequently asked questions
Is tax-equivalent yield the same as after-tax yield?
No. Tax-equivalent yield converts a tax-exempt yield into the gross yield a taxable investment would need to match it. After-tax yield starts with a taxable yield and deducts the modeled tax effect.
Should I add my federal and state tax brackets?
Not automatically. The combined marginal rate depends on which taxes apply to the interest and whether any deduction changes the interaction. Enter a combined effective marginal rate supported by your circumstances or adviser.
Does every municipal bond avoid all taxes?
No. Treatment can depend on the issuer, your residence, the bond, the type of income and other tax rules. Enter the tax-exempt yield after any tax that remains applicable.
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