Tax Equivalent Yield Calculator

A tax-equivalent yield compares the return from a tax-free investment with the pre-tax return required from a taxable investment to leave the same income after tax. It is commonly used when considering municipal bonds against taxable bonds, deposits, or funds. A tax-free yield cannot be compared directly with a taxable yield when an investor pays tax on the taxable income. The tax-equivalent calculation puts both choices on a common before-tax basis, making it easier to identify the taxable yield that would match the tax-free income. The formula is tax-free yield divided by one minus the marginal tax rate. For example, a 3.5% tax-free yield for someone in a 24% marginal bracket has a tax-equivalent yield of approximately 4.61%, because 4.61% multiplied by the 76% left after tax is about 3.5%. The investment amount does not change the percentage comparison; it makes the dollar effect visible. The calculator multiplies the amount by the tax-free yield to show annual tax-free income, then by the tax-equivalent yield to show the taxable income required before tax. The marginal tax rate is an assumption, not necessarily the average tax rate shown on a return. Taxable interest may interact with federal, state, local, alternative-minimum-tax, Medicare surtax, and benefit rules. Municipal-bond interest can be taxable for some purposes, and a bond from outside an investor's home state may not receive the same state treatment. A taxable investment may also have a different credit risk, maturity, liquidity, call feature, fee, or capital-gain profile. Yield alone does not measure total return or suitability. Use the result as a screening comparison. Enter a rate that matches the income tax treatment you expect for the particular investment, then compare credit quality, duration, diversification, costs, and after-tax return across choices. Do not treat the displayed tax difference as a tax saving or guaranteed income. Current tax rules, actual deductions, and the type of account can change the outcome. Consult current tax information and a qualified adviser for a purchase, sale, or tax decision.