After-Tax Return: Meaning and Example

The after-tax return is the return an investor keeps after paying taxes on the investment’s income or gains.

This measure matters because pretax performance can make an investment look better than the cash the investor actually retains.

How It Works

After-tax return depends on:

• the pretax return
• the type of income involved, such as interest, dividends, or capital gains
• the investor’s applicable tax rate
• whether taxes are deferred, avoided, or paid currently

Two investments with the same pretax return can deliver different after-tax results if their tax treatment differs.

Worked Example

Suppose an investment earns a pretax return of 8% and the taxable portion faces a 25% tax rate.

If the whole return is taxed currently at that rate, the after-tax return is:

8% x (1 - 0.25) = 6%

The pretax and after-tax results are not interchangeable.

Scenario Question

An investor says, “My fund earned 9%, so that is my real take-home return.”

Answer: Not necessarily. Taxes can reduce the amount actually kept, especially in taxable accounts.

Related Terms

• After-Tax Yield: A yield-focused version of the same idea.
• Pretax Rate of Return: The return before taxes are applied.
• Tax-Deferred: Tax deferral changes the timing and value of after-tax returns.
• Real Rate of Return: Inflation can reduce the investor’s real return even after taxes are accounted for.
• Tax-Loss Harvesting: Tax planning can improve after-tax return.

FAQs