Tax-Equivalent Yield Calculator
Enter a tax-free yield and your marginal tax bracket to see the taxable-equivalent yield — the number a corporate bond, CD, or savings account has to beat before a tax-free municipal bond is the worse deal.
Tax-Equivalent Yield Calculator
Enter a tax-free yield (such as a municipal bond's) and your marginal tax rate to see what a fully taxable bond would have to pay to match it after tax.
The yield quoted on the tax-exempt bond or fund.
The rate on your last dollar of income, not your average rate.
Set to 0 if your state has no income tax.
Taxable-Equivalent Yield
4.93%
what a taxable bond must pay to match
Combined Tax Rate Avoided
29.0%
federal + state
A 3.50% tax-free yield is worth the same to you as a 4.93% taxable yield. Any fully taxable bond, CD, or savings account paying less than 4.93% leaves you behind after tax; anything paying more comes out ahead.
Simplified: assumes the bond income would otherwise be taxed at your combined federal and (if applicable) state marginal rate. It doesn't model the federal deduction for state taxes, the alternative minimum tax, or the net investment income tax. Not tax advice.
Why a Lower Yield Can Be the Better Deal
A municipal bond's interest is usually exempt from federal income tax, and often from your state's tax too. A taxable bond's interest isn't — the IRS takes a cut at your marginal rate before you keep a dollar. So comparing the two by their headline yields is misleading. The tax-equivalent yield fixes that by asking: what would a taxable bond have to pay to leave you with the same after-tax income?
Tax-equivalent yield = Tax-free yield ÷ (1 − marginal tax rate)
The higher your tax bracket, the more the exemption is worth. A 3.5% muni equals only a 3.98% taxable yield in the 12% bracket, but a 5.56% taxable yield in the 37% bracket — the same bond, two very different break-even points. That's the core reason municipal bonds skew toward higher earners.
Munis vs. Corporate Bonds
Once you have the tax-equivalent yield, the comparison with a corporate bond is direct — but the tax break is only one side of the trade. Weigh it against the differences that the yield number alone hides:
- Taxation — municipal interest is generally federal-tax-free (and state-tax-free for in-state bonds); corporate interest is fully taxable as ordinary income.
- Credit risk— general-obligation munis backed by a government's taxing power tend to default less often than corporate bonds, though revenue munis and lower-rated issuers carry real risk.
- Stated yield — corporates usually advertise higher coupons precisely because that income is taxable; the tax-equivalent yield is what tells you whether the extra is enough to win.
- Who benefits— in a low bracket, a higher-yielding corporate bond often wins outright; in a high bracket, the muni's tax-equivalent yield frequently pulls ahead.
To compare the underlying yields themselves — current yield, yield to maturity, and yield to call — run the bond through the bond yield calculator first, then bring the muni's yield here to put it on a taxable footing.
Where Munis Fit Against Your Other Options
A tax-free bond is only one place to put money, and the tax-equivalent yield is what lets you line it up against the rest. A few things to keep in mind:
- Inside a Roth IRA, growth is already tax-free, so the muni exemption is redundant — taxable bonds or funds with higher yields usually make more sense in that account.
- A high-yield savings account or CDis fully taxable, so compare its rate against the muni's tax-equivalent yield, not its face yield.
- Over a long horizon, the reinvested after-tax income is what compounds — small per-year differences add up.
Use the Roth IRA calculator to see what tax-free growth looks like in a retirement account, weigh cash options in our HYSA vs CD vs index fund comparison, or project how reinvested income compounds with the investment growth calculator.
Related Tools & Articles
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Roth IRA Calculator
See how tax-free growth compounds inside a retirement account
HYSA vs CD vs Index Fund
Where to park cash — yield, access, and risk compared
Investment Growth Calculator
Project how reinvested bond income compounds over time
Frequently Asked Questions
What is tax-equivalent yield?
Tax-equivalent yield (TEY) is the yield a fully taxable investment would need to pay to match the after-tax income of a tax-free one. Because municipal bond interest is usually exempt from federal tax (and sometimes state tax), a 3.5% muni can be worth more to you than a 4% taxable bond once taxes are taken out. TEY restates the tax-free yield on a pre-tax basis so you can compare the two on equal footing.
How do you calculate tax-equivalent yield?
Divide the tax-free yield by one minus your marginal tax rate: TEY = tax-free yield ÷ (1 − tax rate). For a 3.5% muni and a 24% federal bracket, that's 3.5% ÷ (1 − 0.24) = 4.61%. If the bond is also exempt from your state income tax — an in-state muni — add the state rate to the federal rate before subtracting. A taxable bond would have to beat that figure to leave you better off.
What marginal tax rate should I use?
Use the rate on your last dollar of income — your top bracket — not your average (effective) rate, because the muni's exemption applies to income at the margin. The higher your bracket, the more a tax-free yield is worth: at 12% a 3.5% muni equals a 3.98% taxable yield, but at 37% it equals 5.56%. That's why munis tend to favor higher earners.
Are municipal bonds always better than taxable bonds?
No. Munis win only when their tax-equivalent yield beats what you can get on a comparable taxable bond of similar credit quality and maturity. In low tax brackets, the tax break is small and a higher-yielding corporate bond or Treasury often wins outright. Munis also carry credit and interest-rate risk like any bond, and tax-advantaged accounts such as a Roth IRA already shelter income, which can make the muni exemption redundant there.
Do I owe state tax on municipal bond interest?
It depends on where the bond was issued. Interest from a muni issued in your own state is typically exempt from both federal and state income tax, while interest from an out-of-state muni is usually federal-exempt but still taxed by your state. That's why an in-state muni can carry a higher tax-equivalent yield for you than an identical bond from another state — toggle the in-state option in the calculator to see the difference.
Does tax-equivalent yield account for the net investment income tax?
The basic formula above does not. High earners may also owe the 3.8% net investment income tax on taxable bond interest, which municipal interest generally escapes — so the true advantage of a muni can be slightly larger than the simple calculation shows. This calculator uses the straightforward federal-plus-state version; treat its output as a close estimate rather than a tax filing, and confirm specifics with a tax professional.