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Tax Equivalent Yield Calculator
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When I wrote about Vanguard’s Tax Exempt Money Market Fund VMSXX, I explained how you calculated tax equivalent yield. Rather than have you struggle through my poor explanation skills, I built this calculator to calculate the tax equivalent yield for you.
Tax Equivalent Yield Calculator
Anything I should add?
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It appears that you are using the marginal tax rate in your calculator (although I cannot see your algorithm to confirm). To provide a precise tax equivalent yield calculatio, I think you really need to use the effective tax rate, not the marginal rate. That would require the user to input their income rather than the marginal rate or to use a tax table. Your calculator would need to do the rest.
Effective vs. Marginal yield is a tough question. Sometimes the effective (which is a weighted average in essence) can be 10 % points lower or more than the marginal rate…so using both tells you nothing. The only way to really know the cash impact (which is all that matters) is to experiment in a program like TurboTax with what-ifs.
I use the number that the person supplies, if they enter in their effective tax rate then it will calculate that it based on that number.
Effective tax rate is difficult to determine given the different circumstances (deductions, credits, etc), so I didn’t go down that path. Ultimately, if you figure you’re deciding where your “next dollar” goes (or rather, how your next dollar will be earned), then marginal rate is an appropriate measure.
Thanks for the feedback!
Actually, marginal rate is the right thing to use, isn’t it? You’re effectively talking about the last dollars taxed. For simplicity, let’s say that you have $400k in what would otherwise be taxable income (that puts you in the 35% marginal bracket). But… Lo and behold you discover that (say) $10k of your income is actually exempt from federal income taxes. That saves you a full 35% of the $10k, not an amount equal to your effective tax rate. Of course, if the exemption of this income causes you to crossover into the next bracket down, it gets more complex (basically a weighted average of the marginal rates).
It might be useful if the calculator could go both ways.
Love the calculator, with one request: could you increase the size of the little windows? On my mac, I can only view about one digit at a time. It may be a Mac/PC text size thingy. Now if you could only help me know how much tax-free money I can earn without triggering AMT, I’d be eternally greatful.
Monica
^Monica, I’m on a mac also and the windows are normal sized for me. Maybe try Firefox instead of Safari?