Tax-Equivalent Yield Calculator
Tax-equivalent yield calculator. TEY = muni yield ÷ (1 − marginal tax rate). Compare municipal bonds vs taxable bonds at your bracket.
Tax-Equivalent Yield Calculator
A municipal bond's interest is usually free of federal tax (and state tax too, if you live in the issuing state). To compare it fairly with a taxable bond, you "gross it up" to a tax-equivalent yield: the pre-tax yield a taxable bond would need to match the muni after tax. Enter your marginal bracket and the muni yield — optionally a taxable yield to compare against.
How to Use the Tax-Equivalent Yield Calculator
Enter the muni yield
Use the bond's (or muni fund's) current tax-free yield — for funds, the SEC yield is the cleanest comparison figure.
Enter your marginal bracket
Your marginal federal rate — the rate on your last dollar of income, not your average rate. Add your state marginal rate if applicable.
Set the state-exemption toggle
If the muni is issued by your own state, its interest is usually exempt from state tax too — choose "in-state". An out-of-state muni is typically federal-exempt only, so leave state tax out.
Compare against a taxable bond
Enter a taxable bond yield and the tool tells you which wins after tax. If the muni's tax-equivalent yield exceeds the taxable yield, the muni is the better after-tax deal.
Municipal Bonds and the Tax-Equivalent Yield
The Formula and Why It Works
Tax-equivalent yield = muni yield ÷ (1 − your marginal tax rate). The logic: a taxable bond's headline yield gets reduced by tax, so only (1 − rate) of it survives. To deliver the same after-tax income as a tax-free muni, the taxable bond must yield enough more to cover the tax. At a 32% federal rate, a 3.5% muni is equivalent to a 5.15% taxable bond — because 5.15% × (1 − 0.32) = 3.5%. The higher your bracket, the more valuable tax-free income becomes.
In-State vs Out-of-State Munis
Interest from a municipal bond issued in your home state is typically exempt from both federal and state income tax — "double tax-free." A muni from another state is usually federal-exempt only, and your state taxes the interest. That's why the state-exemption toggle matters: for an in-state bond, use your combined federal + state marginal rate; for out-of-state, federal only. The difference can swing the comparison meaningfully in high-tax states.
"At a 37% federal bracket plus a high state tax, a 4% in-state muni can be equivalent to a taxable yield north of 7% — which is why munis are a staple for high earners."
What This Calculator Doesn't Capture
This is the standard tax-equivalent comparison, which covers the large majority of cases. It does not model the federal Alternative Minimum Tax (some "private activity" munis are AMT-taxable), the 3.8% Net Investment Income Tax, the deductibility of state tax against federal (which slightly reduces the effective combined rate), or credit-quality differences between the two bonds. For a high-stakes decision, confirm the after-tax math with a tax professional.
10 Facts About Muni Bonds and Tax-Equivalent Yield
TEY = muni yield ÷ (1 − marginal rate) — the higher your bracket, the higher the equivalent.
Most muni interest is exempt from federal income tax.
In-state munis are usually exempt from state tax too — "double tax-free".
Munis favour high earners: the benefit scales with your marginal rate.
Use your marginal rate (last-dollar), not your average effective rate.
Some "private activity" munis are taxable under the federal AMT.
Muni interest is generally excluded from the 3.8% Net Investment Income Tax.
A fund's SEC yield is the cleanest figure for this comparison.
In a low bracket, munis often lose to taxable bonds after grossing up.
The US muni market is roughly $4 trillion — a core income holding for affluent investors.
Frequently Asked Questions
- It's the pre-tax yield a taxable bond would need to deliver the same after-tax income as a tax-free municipal bond. The formula is muni yield ÷ (1 − your marginal tax rate). It puts tax-free and taxable bonds on the same footing so you can compare them directly.
- Marginal — the rate on your last (highest) dollar of income, because additional bond interest would be taxed at that rate. Using your lower average/effective rate would understate the muni's advantage. For most investors the marginal federal bracket is the right number to enter.
- A muni from your home state is usually exempt from both federal and state tax, so the calculator adds your state rate to the federal rate ("in-state"). An out-of-state muni is typically federal-exempt only and your state taxes the interest, so only the federal rate applies. The toggle picks the correct combined rate.
- Because you supply your own marginal tax rate rather than the tool hardcoding tax brackets. Brackets change yearly, but the formula doesn't — so as long as you enter your current rate, the answer is always correct. That's a deliberate design choice to keep the tool maintenance-free and accurate.
- In a low tax bracket, the gross-up is small, so taxable bonds (or CDs/Treasuries) often pay more after tax. Munis also make little sense inside a tax-advantaged account (IRA/401k), where you'd be wasting the tax exemption. Their sweet spot is taxable accounts held by higher-bracket investors.
- Most muni interest is excluded from the 3.8% Net Investment Income Tax, which is part of their appeal. However, certain "private activity" munis are taxable under the federal Alternative Minimum Tax. This calculator uses the standard comparison and doesn't model AMT — if you're subject to AMT, check whether a specific bond is an AMT bond before relying on the result.
- Slightly. Because state income tax can be deductible against federal (subject to the SALT cap), the true combined marginal rate is a touch below federal + state added together. This tool uses the simple sum for clarity; the effect is small for most filers but a tax professional can refine it for a precise decision.
- Yes — enter the fund's SEC yield as the muni yield. SEC yield is standardised and net of fees, making it the fairest figure to gross up and compare against a taxable bond fund's SEC yield. Just confirm whether the fund is single-state (in-state treatment) or national (federal-only).
- No. It's a comparison tool using the standard tax-equivalent-yield formula and the marginal rate you enter. It doesn't account for your full tax situation, AMT, credit risk, or liquidity. Treat the output as a starting point and confirm material decisions with a CPA or tax adviser.
- Generally no. Inside a tax-advantaged account, all income is already shielded, so a muni's tax exemption is wasted — and munis typically yield less than comparable taxable bonds. The efficient approach is to hold taxable bonds (or Treasuries) inside IRAs/401(k)s and reserve munis for your taxable brokerage account, where their tax-free income actually matters.
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