Tax-Equivalent Yield Calculator
Compare municipal bond yields to taxable bond yields. Find out what a taxable bond would need to earn to match a tax-free muni after accounting for your tax bracket.
Quick Answer
Tax-Equivalent Yield (TEY) = Municipal Bond Yield / (1 - Combined Tax Rate). A 3.5% muni bond in the 24% federal bracket with 5% state tax has a TEY of 4.93% -- meaning a taxable bond would need to yield 4.93% to match the muni's after-tax return.
Your Tax-Equivalent Yield
A taxable bond would need to yield
4.93%
to match a 3.50% tax-free muni in your bracket
Income Comparison (per $10,000 invested)
TEY Reference Table (with 5.00% state tax)
| Federal Bracket | 2% Muni | 3% Muni | 3.5% Muni | 4% Muni | 5% Muni |
|---|---|---|---|---|---|
| 22% | 2.74% | 4.11% | 4.79% | 5.48% | 6.85% |
| 24% | 2.82% | 4.23% | 4.93% | 5.63% | 7.04% |
| 32% | 3.17% | 4.76% | 5.56% | 6.35% | 7.94% |
| 35% | 3.33% | 5.00% | 5.83% | 6.67% | 8.33% |
| 37% | 3.45% | 5.17% | 6.03% | 6.90% | 8.62% |
About This Tool
The Tax-Equivalent Yield Calculator helps investors compare municipal bond yields to taxable bond yields on an apples-to-apples basis. Municipal bonds (munis) pay interest that is typically exempt from federal income tax and often exempt from state and local taxes as well. Because of this tax advantage, muni bonds usually offer lower stated yields than taxable bonds. The key question for investors is whether the lower muni yield is actually a better deal after accounting for the taxes you would owe on a taxable bond.
The Tax-Equivalent Yield Formula
The formula is straightforward: TEY = Municipal Bond Yield / (1 - Combined Tax Rate). The combined tax rate is your marginal federal income tax rate plus your state income tax rate. For example, if you are in the 24% federal bracket and pay 5% state income tax, your combined rate is 29%. A 3.5% muni yield has a TEY of 3.5% / (1 - 0.29) = 4.93%. This means a taxable bond would need to yield at least 4.93% to give you the same after-tax income as that 3.5% muni.
When Municipal Bonds Make Sense
Municipal bonds become increasingly attractive as your tax bracket rises. Investors in the 32%, 35%, or 37% federal brackets benefit the most from tax-exempt income because the tax savings are proportionally larger. In high-tax states like California (13.3%), New York (10.9%), or New Jersey (10.75%), the advantage is amplified further because you avoid both federal and state taxes on the income. Conversely, investors in lower tax brackets or residents of states with no income tax (Texas, Florida, Nevada, Washington, and others) may find that taxable bonds offer better total returns.
Types of Municipal Bonds
General obligation (GO) bonds are backed by the full faith and credit of the issuing municipality, including its taxing power. Revenue bonds are backed by the income generated by a specific project such as a toll road, water system, or hospital. GO bonds are generally considered lower risk because the municipality can raise taxes to pay bondholders, while revenue bonds depend on the financial performance of the underlying project. Both types typically offer tax-exempt interest, but credit quality and yield vary significantly.
Important Tax Considerations
While most municipal bond interest is exempt from federal income tax, there are important exceptions. Certain private activity bonds may be subject to the Alternative Minimum Tax (AMT). State tax exemption generally applies only to bonds issued within your state of residence -- a California resident holding a New York muni bond would owe California state income tax on that interest. Capital gains from selling muni bonds at a profit are taxable at the federal level regardless of the bond's tax-exempt status. Investors should also consider that muni bond interest, while not directly taxed, is included in the calculation for determining whether Social Security benefits are taxable and may affect eligibility for certain tax credits.
Comparing to Treasury Yields
U.S. Treasury bonds are exempt from state and local income taxes but are fully subject to federal income tax. When comparing munis to Treasuries, you only need to adjust for the state tax difference rather than the full combined rate. This calculator accounts for both federal and state taxes in its TEY calculation, making it suitable for comparing munis to corporate bonds, CDs, and other fully taxable fixed-income investments. For Treasury comparisons, set the state tax rate to zero and compare only against the federal bracket.