Tax-Equivalent Yield Calculator
The taxable yield that would match a tax-free yield after tax at your rate, with a direct comparison against a taxable yield and the tax rate at which they break even.
Result
Tax-equivalent yield: 5.1471%
At the one tax rate you enter. Whether interest is exempt, and at which levels, depends on the bond and where you live. Not tax advice.
- Taxable yield after tax
- 3.4%
- Tax rate at which they are equal
- 30%
- Note
- At this tax rate the tax-free yield keeps more after tax.
https://calcgallery.com/investment-returns/tax-equivalent-yield-calculator/
Results are arithmetic on the returns, rates and horizons you enter, not a forecast and not investment, tax or retirement advice. The site supplies no expected return, inflation rate, contribution limit, tax rate or withdrawal rate. Real returns vary from year to year, and fees, taxes and the order of returns all change the outcome. Check anything that matters with a qualified adviser. Read the full disclaimer
How to use the Tax-Equivalent Yield Calculator
- Enter the yield on the tax-free investment, such as a municipal bond.
- Enter the tax rate you would pay on taxable interest.
- Optionally enter a taxable yield you are comparing it with, to see which keeps more after tax.
The formulas
tax-equivalent yield = tax-free yield ÷ (1 − tax rate)taxable yield kept = taxable yield × (1 − tax rate)break-even tax rate = 1 − tax-free yield ÷ taxable yieldThe first line is the second turned around: a taxable yield keeps (1 − tax rate) of itself, so it matches the tax-free yield when it is that yield divided by (1 − tax rate).
Comparing like with like
The comparison holds only between investments of similar risk and term. A tax-free bond from a small issuer and a Treasury note differ in more than tax, and a higher yield after tax can be payment for more risk.
What the diagram shows
The tax-free yield beside what the taxable yield keeps after tax; the taller bar keeps more. Without a taxable yield to compare, the second bar is the taxable yield that would match.
With your numbers
- Tax-equivalent yield = 3.5% ÷ (1 − 32%) = 5.1471%
- Taxable yield after tax = 5% × (1 − 32%) = 3.4%
Quick reference
At the one tax rate you enter. Whether interest is exempt, and at which levels, depends on the bond and where you live. Not tax advice.
| Example | Tax-equivalent yield |
|---|---|
| 3% tax-free at 24% | 3.9474% |
| 3% tax-free at 0% | 3% |
| 4% tax-free at 37% | 6.3492% |
| 3.5% against 5% at 32% | 5.1471% |
| 3.5% against 5% at 22% | 4.4872% |
| 2.8% against 4.2% at 35% | 4.3077% |
Common questions about the Tax-Equivalent Yield Calculator
- Which tax rate should I enter?
- The rate you would pay on one more unit of taxable interest, your marginal rate, not your average rate across all income. If the tax-free interest is also free of state or local tax, and the taxable alternative is not, use a rate that includes those taxes. How they combine depends on your situation, so the page takes a single rate and supplies none.
- Why does the tax-free yield win at high tax rates only?
- Tax takes a bigger share of taxable interest as your rate rises, so the tax-free yield is worth more to someone in a high bracket. A 3.5% tax-free yield is worth 5.15% taxable at a 32% rate, but only 4.49% at 22%. Against a 5% taxable yield the two break even at a 30% rate.
- Is municipal bond interest always tax-free?
- Not always. Some municipal bonds are taxable, some interest is exempt from federal but not state tax, and some can count towards the alternative minimum tax in the US. Check how the particular bond is taxed where you live before relying on the comparison.