What Is After-Tax Yield and How Is It Calculated?

An investment’s advertised return is rarely what an investor keeps, as taxes can take a significant portion of investment income and reduce the real return. After-tax yield measures the performance of an investment after accounting for the impact of taxes, providing a true picture of its profitability. Calculating the after-tax yield allows for a more accurate comparison between different investment options that may be taxed differently. This lets an investor see which option provides a better net return for their specific financial situation.

The After-Tax Yield Calculation

The formula to determine an investment’s true return is: After-Tax Yield = Pre-Tax Yield × (1 – Marginal Tax Rate). The pre-tax yield is the stated return of an investment before taxes are considered. For example, if a corporate bond has a stated yield of 6%, that is its pre-tax yield, representing the total income generated before tax obligations.

The marginal tax rate is the rate paid on the next dollar of earned income, not an investor’s average tax rate. To determine this, an investor must combine their federal income tax bracket with any applicable state and local income tax rates. This combined rate reflects the total tax on any additional investment income.

For the 2025 tax year, the U.S. has seven federal income tax brackets:

• 10%
• 12%
• 22%
• 24%
• 32%
• 35%
• 37%

An individual must identify which bracket their income falls into to find their federal marginal rate. For instance, an investor in the 24% federal tax bracket who also pays a 6% state income tax would have a combined marginal tax rate of 30%.

Using this combined rate provides a precise measure of how much of the investment’s earnings will be retained. If the investor with a 30% marginal tax rate purchased the corporate bond with a 6% pre-tax yield, their after-tax yield would be 4.2%. This is the actual return the investor pockets after all income taxes are paid.

Comparing Taxable and Tax-Exempt Investments

A primary use of the after-tax yield calculation is to make direct comparisons between taxable investments, like corporate bonds, and tax-exempt investments, such as municipal bonds. Municipal bond interest is exempt from federal income tax and sometimes from state and local taxes for residents of the issuing state. This creates a situation where a taxable bond with a higher stated yield may provide a lower net return than a tax-exempt bond with a lower stated yield.

Consider an investor with a combined marginal tax rate of 35% who is choosing between two bonds. The first is a corporate bond with a pre-tax yield of 7%, and the second is a municipal bond with a yield of 5%. For the corporate bond, the after-tax yield is 7% × (1 – 0.35), which equals 4.55%. The municipal bond’s federally tax-exempt yield remains 5%, making it the more profitable choice.

Another tool for this comparison is the tax-equivalent yield formula. This calculation determines what a taxable investment would need to yield to match the return of a tax-exempt one. The formula is: Tax-Equivalent Yield = Tax-Exempt Yield / (1 – Marginal Tax Rate). This approach is helpful for investors considering municipal bonds, as it frames the comparison in terms of the more familiar taxable yield.

Using the same numbers, an investor can calculate the tax-equivalent yield for the 5% municipal bond. The calculation would be 5% / (1 – 0.35), which results in a tax-equivalent yield of approximately 7.69%. This means a taxable corporate bond would need to offer a yield of 7.69% to provide the same net return as the 5% municipal bond for this investor.

How Investment Income Type Affects Taxation

The marginal tax rate used in the after-tax yield calculation can change depending on the specific type of income an investment generates. Not all investment returns are taxed in the same way, and understanding these differences is necessary for accurate comparisons.

Interest income from corporate bonds, certificates of deposit (CDs), and high-yield savings accounts is taxed at the investor’s ordinary income tax rate. This is the same marginal rate used for wages, which for 2025 can be as high as 37% at the federal level, plus any applicable state taxes. Non-qualified dividends, which are dividends that do not meet specific IRS criteria, are also taxed at these higher ordinary income rates.

A different set of rules applies to qualified dividends, which are taxed at more favorable long-term capital gains rates. For a dividend to be “qualified,” the investor must meet certain holding period requirements. Specifically, the stock must be held for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date.

For 2025, the long-term capital gains tax rates are 0%, 15%, or 20%, depending on the investor’s taxable income. For example, a single filer with a taxable income up to $48,350 would pay 0% on qualified dividends, while an individual with income between $48,351 and $533,400 would pay 15%. When calculating the after-tax yield for an investment that pays qualified dividends, the investor must use their specific capital gains tax rate, not their ordinary income tax rate.