Tax Equivalent Yield Calculator

Category: Investment
- April 24, 2025
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Compare taxable and tax-exempt investments by calculating the equivalent taxable yield required to match the return of a tax-exempt investment.

This calculator helps investors determine whether taxable or tax-exempt investments offer a better after-tax return based on their tax situation.

Investment Information

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About Tax Equivalent Yield

Tax equivalent yield is the pre-tax yield that a taxable bond needs to possess for its yield to be equal to that of a tax-free municipal bond. This calculation is important because it allows investors to fairly compare returns between taxable and tax-exempt investments.

When to Use This Calculator
  • When comparing municipal bonds to corporate bonds or other taxable investments
  • When evaluating investment options in different tax brackets
  • When planning tax-efficient investment strategies
  • When determining if a tax-exempt investment offers better after-tax returns
Important Considerations
  • State and local taxes may not apply to in-state municipal bonds
  • Tax rates can change based on income levels and tax code revisions
  • Some municipal bonds may be subject to the Alternative Minimum Tax (AMT)
  • Consider other factors beyond yield, such as credit quality and duration

What Is the Tax Equivalent Yield Calculator?

The Tax Equivalent Yield Calculator is a powerful finance calculator that helps you compare the return on tax-exempt investments with taxable ones. This tool is especially useful when you're evaluating municipal bonds versus corporate or government bonds. It shows the yield a taxable investment would need to offer to match the after-tax return of a tax-free investment.

Formula:
TEY = TFY ÷ (1 - CTR)

Where:
TEY = Tax Equivalent Yield
TFY = Tax-Free Yield
CTR = Combined Tax Rate
Combined Tax Rate Formula:
CTR = FTR + STR × (1 - FTR) + LTR × (1 - FTR)

FTR = Federal Tax Rate
STR = State Tax Rate
LTR = Local Tax Rate

Why Use This Investment Calculator?

When you're making investment decisions, especially in high tax brackets, it's important to consider after-tax returns. This calculator acts as a smart investment planner and investment returns guide by helping you:

It's particularly helpful as a financial planning tool for high-income earners, retirees, and anyone optimizing long-term tax strategies.

How to Use the Calculator Effectively

  1. Enter the yield of your tax-exempt investment (e.g., a municipal bond).
  2. Input your federal, state, and local tax rates. These help calculate your total tax burden.
  3. Adjust the number of decimal places for your result if needed.
  4. Check the box to view the calculation steps for transparency.
  5. Click Calculate to view your tax equivalent yield.
  6. Use the Reset button to start a new comparison.

What the Result Tells You

The result shows the tax equivalent yield, which is the return a taxable investment would need to match your tax-exempt one. If the yield on a taxable bond is higher than this value, it might offer better after-tax returns. If not, the tax-exempt bond is likely the better option.

When This Calculator Is Most Useful

Frequently Asked Questions

What is a tax-equivalent yield?

It's the yield a taxable bond would need to match the return of a tax-free bond after taxes are applied. It helps compare apples to apples between investments.

Does this calculator consider all types of taxes?

Yes, it includes federal, state, and local income taxes. However, in some states, municipal bonds may be exempt from state and local taxes if issued in-state.

Is this only useful for bonds?

Mostly, yes. But it's also a handy investment analysis tool whenever you’re weighing tax-free versus taxable income options.

Can this help with long-term financial planning?

Absolutely. It’s a helpful investment planning tool for tax-conscious strategies, and complements other tools like a compound interest calculator or future value tool.

Conclusion

The Tax Equivalent Yield Calculator is a practical, user-friendly addition to your suite of financial tools. It simplifies a critical part of financial planning by helping you understand the real value of your investments. Use it alongside other tools like a future investment value estimator or bond calculator to make smarter, more profitable decisions.