# How Do I Calculate Tax Equivalent Yield?

#### How do i calculate tax equivalent yield?

The calculation of a tax equivalent yield helps you compare taxable and tax-free investments. It allows you to evaluate the potential returns that can be generated by investing in different types of bonds and see whether they are worth your time and money.

Tax-free bonds, such as municipal bonds, offer passive income that isn’t subject to state or federal taxes. These bond interest payments are often less than what they would be in a savings account or certificate of deposit, and can help reduce your tax liability.

But not all bond investments are created equal. Some, such as corporate bonds, pay more in interest but may be subject to taxation on that income. This is called the after-tax yield of a bond, and it’s an important part of determining which bonds are most appropriate for your portfolio.

For example, if you’re taking a financial exam, a question might ask you to determine which type of municipal bond will give you the most after-tax yield. This will depend on your personal situation and your tax bracket, so it’s essential to know the correct formula for calculating this number.

First, the tax-free yield: To calculate the tax-free yield, look at the rate of interest paid on a tax-exempt bond and divide it by one minus your marginal tax rate. Then, you’ll need to subtract the amount of federal income tax and any state tax you’re required to pay on your interest payment from that figure. If you live in a state that has additional taxes, like New York, you’ll need to include those.

Next, the tax-equivalent yield: This is a measure of the minimum pretax yield that a taxable bond must have to match the return an investor would receive on a comparable tax-free bond. The tax-equivalent yield is used by investors to determine which taxable bonds will provide them with the highest potential returns.

This formula will vary based on your tax bracket and the taxes you pay in your state of residence. It’s best to use a tax calculator, which can also tell you how much your state and local taxes are, to get the most accurate results.

If you’re unsure how to use this tool, talk with a financial advisor who can help you evaluate the best type of bond for your specific situation. They can also help you create a balanced portfolio that includes both taxable and tax-free investments to reduce your overall tax liability.