Tax-Equivalent Yield Calculator
Compare a tax-free municipal bond with a taxable bond fairly — the taxable yield you would need to match a muni after federal and state tax.
How it works
TEY = tax-free yield ÷ (1 − tax rate) · taxable after tax = taxable yield × (1 − tax rate)
Municipal bond interest is usually exempt from federal tax (and state tax if you live in the issuing state), so its stated yield is what you keep. A taxable bond hands part of its coupon to the government, so to compare fairly you gross the muni up to the taxable yield that would survive tax to the same amount. The higher your bracket, the more the tax break is worth — which is why munis mostly appeal to high earners.
Worked example
A 3.5% in-state muni for someone in a 24% federal and 5% state bracket has a combined rate of 29%. Its tax-equivalent yield is 3.5% ÷ (1 − 0.29) = 4.93%. A 4.5% taxable bond only keeps 4.5% × 0.71 = 3.20% after tax, so the muni is the better deal here.
Frequently asked questions
Should I use my marginal or average tax rate?
Use your marginal rate — the rate on your next dollar of income — because bond interest stacks on top of your other income and is taxed at that top bracket, not your blended average.
When are munis exempt from state tax too?
Generally when you buy bonds issued within your own state. Out-of-state munis are usually still federally tax-free but taxable by your state, so set the "also state-exempt" option to No for those.
Do munis always win for high earners?
Not always. It depends on the specific yields on offer. This tool shows the after-tax yield of each side so you can compare the actual bonds you are choosing between, not just a rule of thumb.
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Educational estimate, not investment advice. Markets involve risk of loss and future returns are never guaranteed.