Tax-Equivalent Yield Calculator
Calculate the tax-equivalent yield of municipal bonds.
Compare tax-free bond yields to taxable investment yields based on your tax bracket.
How Tax-Equivalent Yield Works
Municipal bonds (munis) pay interest that is exempt from federal income tax (and often state tax). To compare a muni’s yield fairly against a taxable bond, you must calculate its tax-equivalent yield — the yield a taxable bond would need to match the muni after taxes.
Tax-equivalent yield formula:
TEY = Municipal Bond Yield ÷ (1 − Marginal Tax Rate)
Worked example:
- Municipal bond yield: 3.2%
- Federal marginal tax rate: 32%
TEY = 3.2% ÷ (1 − 0.32) = 3.2% ÷ 0.68 = 4.71%
A taxable bond must yield at least 4.71% to provide the same after-tax income as the 3.2% muni.
Including state tax (if muni is double tax-exempt):
TEY = Muni Yield ÷ (1 − Federal Rate − State Rate)
For a California resident at 32% federal + 9.3% state:
TEY = 3.2% ÷ (1 − 0.32 − 0.093) = 3.2% ÷ 0.587 = 5.45%
Break-even tax rate:
Break-even rate = 1 − (Muni yield ÷ Taxable yield)
If the comparable taxable bond yields 4.5%:
Break-even = 1 − (3.2% ÷ 4.5%) = 1 − 0.711 = 28.9%
If your combined marginal rate exceeds 28.9%, the muni is the better choice.
When munis make sense:
- Federal marginal rate of 22% or higher (munis start becoming competitive)
- High state income tax (California, New York, New Jersey amplify the benefit)
- High-yield taxable bonds carry credit risk that munis typically do not
Munis rarely make sense in tax-advantaged accounts (IRAs, 401k) — the tax exemption is wasted inside a tax-sheltered wrapper.