Tax-equivalent taxable yield and supporting figures
The tax rate is the marginal rate applicable to the taxable interest, entered as a percent. The tax-exempt yield is assumed fully exempt from the taxes represented by that rate. Differences in yield are percentage points.
For a separate dividend-income and share-price calculation, the Dividend Yield Calculator estimates gross yield before your tax treatment.
The formula
The tax rate is the marginal rate applicable to the taxable interest, entered as a percent. The tax-exempt yield is assumed fully exempt from the taxes represented by that rate. Differences in yield are percentage points.
Worked tax equivalent yield example
A 4% tax-exempt yield with a 25% applicable marginal tax rate is equivalent to 5.3333% taxable yield. A 5% taxable yield leaves 3.75% after tax, 0.25 percentage points below the exempt yield.
How to use this calculator
- Enter tax-exempt annual yield, applicable marginal tax rate.
- Set taxable annual yield to compare using the stated units or choices.
- Calculate and compare tax-equivalent taxable yield, after-tax taxable yield, exempt yield minus after-tax taxable yield.
Choosing inputs for tax equivalent yield
Use the tax rate that applies to the interest being compared, rather than an average tax rate across all household income. Tax-exempt describes a specific treatment: an investment can be exempt from one level of tax but subject to another. The calculator does not determine whether a particular security qualifies for exemption.
Tax-equivalent yield places the exempt yield on a taxable basis. It is the taxable rate that would leave the same income after the entered tax is applied. After-tax taxable yield performs the comparison in the other direction, and the signed difference shows which yield is higher under those inputs.
Interpreting tax-equivalent taxable yield
Match the yield conventions and holding periods before comparing securities. A coupon rate, current yield, yield to maturity, and a fund’s standardized yield describe different quantities. Credit risk, duration, call provisions, transaction costs, and price changes can outweigh a small tax-adjusted difference; this tool compares interest rates, not the overall suitability of investments.
Assumptions & limitations
What this calculation assumes
- Tax applies proportionally to taxable interest at the entered marginal rate.
- The exempt interest avoids every tax represented in that rate.
What to keep in mind
- Capital-gains tax, state/federal interactions, alternative minimum tax, fees, and tax-bracket changes are not calculated.
Common questions
Can the tax rate be 100%?
No. The taxable-equivalent formula has a zero denominator at 100%, so the input is bounded below that value.
Is the result an investment recommendation?
It is an arithmetic interest comparison. It does not compare risk or verify a security’s tax treatment.
Should I add federal and state rates automatically?
No. Enter a justified applicable marginal rate; the tool does not model tax interactions or verify state exemption.
Sources & further reading
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