Muni Bond Tax-Equivalent Yield Calculator
Convert a tax-free municipal bond yield into the taxable yield you would need, accounting for both federal and state income tax.
How it works
Tax-equivalent yield = muni yield ÷ (1 − combined tax rate) · In-state combined = 1 − (1 − federal)(1 − state)
Municipal bond interest is exempt from federal income tax, and if you buy a bond issued in your own state it is usually free of state tax too. To compare a tax-free muni against a taxable bond fairly, you gross the muni yield up by your tax rate — the tax-equivalent yield is what a taxable bond would have to pay to leave you with the same after-tax income. The higher your bracket, the more valuable the exemption, which is why munis favor high earners.
Worked example
A 3.5% in-state muni for someone in the 32% federal and 6% state brackets faces a combined rate of 1 − (0.68)(0.94) ≈ 36.1%. The tax-equivalent yield is 3.5% ÷ (1 − 0.361) ≈ 5.48% — a taxable bond must beat 5.48% to come out ahead.
Frequently asked questions
Why combine federal and state rates multiplicatively?
Because state income tax is often deductible against or interacts with federal tax, stacking them as 1 − (1 − fed)(1 − state) avoids double-counting. For an out-of-state muni, only the federal exemption applies, so just the federal rate is used.
Do munis make sense in a tax-advantaged account?
Rarely. In an IRA or 401(k) all interest already grows tax-deferred, so you gain nothing from the exemption and give up the higher yields of taxable bonds. Munis belong in taxable accounts, ideally for higher earners.
Are municipal bonds ever taxable?
Yes. Out-of-state munis owe state tax, some bonds are subject to the alternative minimum tax, and any capital gain from selling above your cost is taxable. The federal exemption covers the interest, not gains — check each bond’s specifics.
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Educational estimate, not investment or tax advice.