Tax-Equivalent Yield Calculator (municipal vs taxable bonds, federal + state)

Understanding the tax-equivalent yield calculator — concept and principle

Interest from most US municipal bonds is free of federal income tax, so a lower municipal yield can be worth more than a higher taxable yield. The tax-equivalent yield tells you what a taxable bond would have to pay to leave you with the same income after tax.

At a 35.8% combined rate, a taxable bond must yield 4 ÷ 0.642 = 6.23% to match a 4% tax-free yield.

How it is calculated

Combined tax rate on taxable interest = federal rate + net investment income tax + state rate (state tax simply added, ignoring any deduction).
Tax-equivalent yield = tax-free yield ÷ (1 − combined rate).
If the municipal bond is from another state, your state usually taxes its interest, so its yield is first reduced by the state rate.
After-tax yield of a taxable bond = taxable yield × (1 − combined rate).

The principle

What matters to an investor is the income kept after tax. A taxable bond loses part of its interest to tax; a tax-free bond does not. Dividing the tax-free yield by the share of taxable interest you keep, (1 − t), gives the pre-tax yield that would leave you with the same amount. The higher your tax bracket, the more a tax exemption is worth, which is why municipal bonds appeal most to high earners.

Worked example

Default inputs: municipal yield 4%, federal rate 32%, net investment income tax 3.8%, no state tax, bond free of state tax, taxable alternative 5.5%.

Combined tax rate = 32 + 3.8 + 0 = 35.8%.
Tax-equivalent yield = 4 ÷ (1 − 0.358) ≈ 6.23%.
After-tax yield of the tax-free bond = 4%.
After-tax yield of the 5.5% taxable bond = 5.5 × 0.642 ≈ 3.53%.
Tax-free bond is better after tax, by 0.47 points.

Each point is the calculator re-run with only “Yield of the tax-free (municipal) bond (%)” changed; the gold point is the default example. Change the inputs above and this chart follows your numbers.

Yield of the tax-free (municipal) bond (%)	Tax-equivalent yield
1	1.56%
2	3.12%
3	4.67%
4	6.23%
5	7.79%
6	9.35%
8	12.46%

How to read the result

If the taxable bond yields less than the tax-equivalent yield, the municipal bond leaves you with more after tax. Compare bonds of similar credit quality and maturity; a higher yield may reflect higher risk. Investors in low tax brackets may find taxable bonds better.

Common mistakes

Using your average tax rate instead of your marginal rate.
Forgetting state tax on out-of-state municipal bonds.
Ignoring the alternative minimum tax on some private-activity municipal bonds.
Comparing bonds with different credit ratings or call features.

Keep in mind: Tax treatment depends on your situation and current law. This is not tax or investment advice; confirm with a tax professional.

Frequently asked questions

What is the tax-equivalent yield formula?

Tax-free yield ÷ (1 − tax rate).

Are municipal bonds always tax-free?

Interest on most is exempt from federal income tax, but state tax and the AMT may apply in some cases.

Which tax rate should I use?

Your marginal rate, the rate on your next dollar of income, including any extra tax on investment income.

Sources: FINRA, "Municipal Bonds" investor guidance (tax-equivalent yield) · MSRB, Electronic Municipal Market Access (EMMA) education center

Checked 9 Nov 2026. Eagle Asset Management, “Tax-equivalent yield: An overlooked advantage in municipal bonds” (November 2023): TEY = municipal yield ÷ (1 − tax rate); example 4.00% at 32% + 3.80% surcharge → 6.23%. Treatment of state tax: our simplification (rates added, no deduction).

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