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Computing After-Tax Yield

To compute your after tax yield on an investment, you'll need to your tax bracket (marginal tax rate) and the stated, pre-tax yield of your investment. The formula for determining the pre-tax yield you'll need to equal a particular after-tax yield is:

After-tax Yield = Taxable Interest Rate * (1.00 - Marginal Tax Rate)



Example

Myrtle is in the 15 percent marginal tax bracket. She purchased a seven-year Certificate of Deposit (CD) with an annual pre-tax yield of 3.25 percent. To find the after-tax yield, Myrtle subtracts .15 from 1.0, which gives her .85. She multiples her pre-tax yield (3.25 percent) by .85 to determine her after-tax yield is 2.75 percent.

In contrast, her daughter is in the 28 percent tax bracket. The daughter's after-tax yield is only 2.34 percent.

To further illustrate, here are a few after-tax equivalents for pre-tax yields. As you can see, the higher your tax bracket, the higher the pre-tax yield needs to be in order to return your desired post-tax yield.

To use the table, locate your marginal tax rate in the first column, and read across that line and locate the pre-tax yield. The number in the top of that column is your after-tax yield.


Sample After-Tax and Pre-Tax Yield Comparison
Tax rate (%) After-tax yield (%): 2.0 3.0 4.0 5.0 6.0 7.0 8.0 10.0 12.0
  Pre-tax yield (%): EQUALS
10   2.22 3.33 4.44 5.56 6.67 7.78 8.89 11.11 13.33
15   2.35 3.53 4.70 5.88 7.05 8.24 9.42 11.76 14.18
25   2.67 4.0 5.33 6.67 8.0 9.33 10.67 13.33 16.0
28   2.77 4.17 5.56 6.94 8.33 9.72 11.11 13.89 16.67
33   2.99 4.48 5.98 7.46 8.96 10.45 11.94 14.93 17.91
35   3.08 4.62 6.15 7.69 9.23 10.77 12.31 15.38 18.46
39.6   3.31 4.97 6.62 8.28 9.93 11.59 13.24 16.56 19.87