About the Tax-Equivalent Yield Calculator
This tax-equivalent yield calculator converts the yield on a tax-free municipal bond into the pre-tax yield a taxable investment — a corporate bond, CD, Treasury or money market fund — would need to pay to leave you with the same income after tax. Enter the muni yield, your federal bracket and state tax rate, and optionally a taxable yield you are comparing it with.
It is useful for investors in higher tax brackets choosing between muni funds and taxable bond funds, retirees building a taxable income portfolio, and anyone comparing an in-state muni with an out-of-state one. The chart shows how the muni’s value changes across tax brackets, so you can see where it starts to win.
Interest on municipal bonds is generally exempt from federal income tax and from the 3.8% net investment income tax, and bonds issued in your own state are usually exempt from state tax too. The calculator treats federal and state rates as additive (state tax is rarely deductible under the SALT cap). Private-activity bonds may be subject to AMT, and muni capital gains are taxable. Federal brackets are the 2026 rates (10%–37%); the NIIT thresholds of $200,000 single and $250,000 joint are fixed in law.
With the default inputs, the tax-equivalent yield is 4.93%. Change any value above to recalculate instantly.
How to use the tax-equivalent yield calculator
- 1Enter the yield on the municipal bond or fund (use yield to worst or SEC yield).
- 2Pick your federal bracket and enter your state income tax rate.
- 3Say whether the bond is from your own state and whether you pay NIIT.
- 4Enter a taxable yield you are considering to compare after-tax income.
Formula and method
The tax-equivalent yield is the taxable yield that leaves the same after-tax income as the tax-free bond. For a bond exempt from both federal and state tax, divide the muni yield by one minus your combined tax rate (federal bracket + NIIT if it applies + state rate). For an out-of-state muni that your state taxes, first reduce the muni yield by the state tax, then divide by the same combined rate.
The after-tax yield on the taxable alternative is its yield × (1 − combined rate). Whichever after-tax yield is higher gives more spendable income. The method assumes interest is taxed at your marginal rate and ignores deductibility of state tax, AMT on private-activity bonds and the de minimis rule for discounted munis. Treasury interest is exempt from state tax, so when comparing an in-state muni with a Treasury, set the state rate to 0% for a like-for-like result.
- f
- Federal marginal tax rate
- n
- Net investment income tax (3.8%) if applicable
- s
- State income tax rate
Worked examples
3.5% in-state muni in the 24% bracket
With a 24% federal and 5% state rate, the combined rate is 29%, so TEY = 3.5% ÷ 0.71 = 4.93%. A 4.5% taxable bond keeps only 3.195% after tax, so the muni earns $305 more a year on $100,000.
Top-bracket Californian with NIIT
Federal 37% + NIIT 3.8% + state 9.3% = 50.1%. A 3.2% in-state muni is equivalent to 3.2 ÷ 0.499 = 6.41% taxable, so even a 5% corporate bond, worth 2.495% after tax, falls well short.
Out-of-state muni in the 12% bracket
State tax cuts the 3% muni to 2.85%. Dividing by 1 − 17% gives a TEY of 3.43%. The 4.5% taxable bond keeps 3.735% after tax, so the taxable bond wins at this lower bracket.
Frequently asked questions
How do you calculate tax-equivalent yield?+
Divide the tax-free yield by one minus your tax rate. For example, a 3% muni for someone in the 32% bracket has a tax-equivalent yield of 3% ÷ 0.68 = 4.41%. Add your state rate if the bond is also state tax-free.
Are municipal bonds worth it in a low tax bracket?+
Often not. In the 10% or 12% brackets the tax saving is small, so taxable bonds, CDs or Treasuries usually pay more after tax. Munis tend to win from the 24% bracket upwards, especially in high-tax states.
Is municipal bond interest exempt from state tax?+
Usually only for bonds issued in your own state (and by US territories such as Puerto Rico). Most states tax interest from other states’ munis, which reduces their after-tax yield.
Are municipal bonds subject to the 3.8% NIIT?+
No. Tax-exempt interest is not net investment income, so high earners avoid the 3.8% surtax on munis while taxable interest can be hit by it, raising the tax-equivalent yield.
Should I hold munis in an IRA or 401(k)?+
Generally no. Retirement accounts already shelter interest from tax, so the lower muni yield just costs you income. Munis belong in taxable brokerage accounts.
Results are estimates for educational purposes and are not financial advice. Rates, fees and terms vary — confirm with your lender or a licensed advisor before making decisions.