To calculate the after-tax nominal interest rate, multiply the stated (nominal) rate by one minus your marginal tax rate. That’s the formula:
After-Tax Nominal Rate = Nominal Rate × (1 − Marginal Tax Rate)
A 5 percent savings account, held by someone in the 24 percent federal bracket, actually yields 3.8 percent once federal tax is taken out. The gap widens as your income rises, and it grows again once state tax and any surcharges are layered in.
Step 1: Find Your Marginal Tax Rate
Your marginal rate is the tax percentage that applies to your last dollar of income, not the average across everything you earn. Interest stacks on top of your wages and other income, so it’s taxed at whatever bracket that top slice falls into. The federal tax code treats interest as ordinary income, taxed at the same rates as wages.{1Office of the Law Revision Counsel. 26 US Code 61 – Gross Income Defined}
For 2026, seven federal brackets apply, running from 10 percent to 37 percent, and the thresholds depend on filing status.{2Internal Revenue Service. Revenue Procedure 2025-32} A few reference points for single filers and married couples filing jointly in 2026:
- 22 percent starts at $50,401 (single) or $100,801 (joint)
- 24 percent starts at $105,701 (single) or $211,401 (joint)
- 32 percent starts at $201,776 (single) or $403,551 (joint)
- 37 percent applies above $640,600 (single) or $768,700 (joint)
Bracket thresholds are adjusted for inflation each year, so check the current figures before running the math.{3Office of the Law Revision Counsel. 26 US Code 1 – Tax Imposed} Your last return or the IRS tax tables will show which bracket your top dollar of income falls in. That bracket percentage is the number you plug into the formula.
Step 2: Run the Formula
The term (1 − Marginal Tax Rate) is the fraction of each interest dollar you keep after tax. At a 24 percent marginal rate, you keep 76 cents of every dollar. Multiply that retention factor by the stated rate and you get the percentage your money actually grows.
Take a certificate of deposit paying 5 percent, held by someone in the 24 percent bracket:
- Convert to decimals: 5% becomes 0.05, 24% becomes 0.24
- Retention factor: 1 − 0.24 = 0.76
- Multiply: 0.05 × 0.76 = 0.038
- Convert back: 0.038 × 100 = 3.8%
On a $10,000 deposit, that’s $380 in real earnings instead of the $500 the advertised rate suggests. The $120 difference goes to the IRS. Someone in the 37 percent bracket holding the same CD would keep only 3.15 percent, or $315 on $10,000.
Adding State Tax
Federal tax is only part of the picture. Most states also tax interest income; a few localities do too. State income tax rates on interest run from roughly 2.5 percent to over 13 percent, and eight states impose no individual income tax at all.
The cleanest approach is to add your state marginal rate to your federal marginal rate, then apply the same formula. With a 24 percent federal bracket and a 5 percent state rate, your combined marginal rate is 29 percent:
0.05 × (1 − 0.29) = 0.0355, or 3.55 percent
This slightly overstates the tax bite, because state income tax is deductible on your federal return through the SALT deduction. That deduction is currently capped, so the full state amount may not come through. For a quick estimate, adding the two rates gets you close.
The 3.8 Percent Surcharge for Higher Earners
If your modified adjusted gross income exceeds certain thresholds, an additional 3.8 percent net investment income tax (NIIT) applies on top of your regular bracket, and interest income is specifically included.{4Office of the Law Revision Counsel. 26 US Code 1411 – Imposition of Tax} The thresholds:
- $250,000 for married filing jointly or qualifying surviving spouse
- $200,000 for single or head of household
- $125,000 for married filing separately
These figures are not indexed for inflation, so more taxpayers cross them each year. The NIIT applies to the lesser of your net investment income or the amount by which your modified adjusted gross income exceeds the threshold.{5Internal Revenue Service. Topic No. 559, Net Investment Income Tax}
If you owe it, roll the 3.8 percent into your marginal rate before running the formula. For someone in the 35 percent bracket who also owes NIIT, the combined federal rate on interest is 38.8 percent. On a 5 percent nominal rate: 0.05 × (1 − 0.388) = 0.0306, or about 3.06 percent after federal tax alone.
When the Formula Doesn’t Apply the Same Way
Two categories of interest get favorable treatment that changes the inputs.
U.S. Treasury Securities
Interest on Treasury bills, notes, and bonds is subject to federal income tax but exempt from all state and local income taxes.{6Internal Revenue Service. Topic No. 403, Interest Received} Federal law specifically prohibits states from taxing interest on U.S. government obligations.{7Office of the Law Revision Counsel. 31 US Code 3124 – Exemption From Taxation} When you compare a Treasury against a taxable alternative, use only the federal rate in the formula for the Treasury and the combined federal-plus-state rate for the alternative.
Municipal Bonds
Interest on bonds issued by state and local governments is generally excluded from federal gross income entirely.{8Office of the Law Revision Counsel. 26 US Code 103 – Interest on State and Local Bonds} Many states also exempt their own municipal bonds from state tax, though they often tax bonds issued by other states. When a bond is exempt from both, the after-tax rate equals the stated rate. To compare a muni against a taxable option, flip the formula to get a taxable equivalent yield: divide the muni rate by (1 − marginal rate). A 3.5 percent muni for a 24-percent-bracket investor: 0.035 ÷ 0.76 = 4.6 percent. A 5 percent taxable CD still wins, but by less than the headline rates suggest.
After-Tax Nominal vs. After-Tax Real Return
The after-tax nominal rate tells you how many dollars you keep. It doesn’t tell you whether those dollars buy more than they did last year. Inflation is the second haircut.
The rough version is subtraction: 3.8% − 3% inflation = 0.8% real. The precise version uses the Fisher equation: divide (1 + after-tax nominal rate) by (1 + inflation rate), then subtract 1. Using the same numbers: (1.038 ÷ 1.03) − 1 = 0.0078, or about 0.78 percent. The gap between shortcut and precise math is small at low rates but compounds over decades.
This is where the calculation can be sobering. A 5 percent savings account looks generous until you subtract a 24 percent bracket and 3 percent inflation and land under 1 percent real. The formula doesn’t change your return, but it changes the question you ask about where your money sits.