Tax-equivalent yield calculator, for dividends taxed two ways

PFF: qualified dividends

PFF, the iShares preferred stock fund, paid 5.79% of its price over the past twelve months. Most preferred dividends are qualified dividends, so the example uses the qualified rate. That is the 15% federal rate on qualified dividends plus a 6.37% state rate and the 3.8% net investment income tax, 25.2% in all.

A bond taxed as ordinary income at 34.2% would have to pay 6.58% to leave the same amount after tax as this 5.79% qualified dividend. That is the tax-equivalent yield, 0.79 percentage points above the fund’s own yield. Tax takes 1.46 percentage points of the yield either way and leaves 4.33%.

JEPI: ordinary income

JEPI, the JPMorgan Equity Premium Income fund, pays 7.38% of its price a year. Most of that income comes from selling options and is taxed as ordinary income. At the full rate of 34.2%, tax takes 2.52 percentage points and leaves 4.86%. Because the income is already taxed at the ordinary rate, the taxable-equivalent yield is the same as the yield, 7.38%. The difference between the two examples is what the lower rate on qualified dividends is worth.

The yields come from the public record pages for PFF and JEPI and refresh every hour. The tax rates are the app’s standard brackets: 24% federal on ordinary income, 15% on qualified dividends, 6.37% state and 3.8% net investment income tax. Enter your own above. Nothing on this page is tax advice.

Tax-equivalent yield = yield × (1 − tax on this income) ÷ (1 − tax on ordinary income). The first bracket is what you keep of this yield; dividing by the second asks what a fully taxed yield would have to be to keep the same.

The after-tax yield is the yield times one minus your tax rate on that kind of income. The tax-equivalent yield is the after-tax yield divided by one minus your rate on ordinary income. The rates add up: federal, state and the net investment income tax. Different kinds of income are taxed at different rates. Qualified dividends, which most bank and utility preferreds pay, get the lower federal rate. Ordinary dividends and the interest on a baby bond are taxed at the full rate. REIT dividends are taxed at the full rate after the 20% deduction under Section 199A, which applies to the federal part only.

• Municipal bonds. The page compares a dividend with a fully taxed bond, not with a tax-exempt one; a municipal bond’s own tax-equivalent yield is its yield divided by one minus your ordinary rate.
• Return of capital. Part of a covered-call fund’s distribution is often not taxed when it is paid. It lowers your cost basis instead. The app’s After-Tax Distribution Yield calculator, on the Plus plan, handles that.
• The holding period a qualified dividend requires, 61 days around the ex-dividend date, and the few states that do not tax qualified dividends.
• Whether the fund or issuer can keep paying. The record page covers that.

In the app, the same calculator reads the tax treatment the fund has filed and your saved tax brackets, and compares the result with the 10-year Treasury yield. Open it in the app. It comes with the free Starter plan.