Tax-Equivalent Yield Calculator

Welcome to the Tax-Equivalent Yield Calculator, a comprehensive tool designed to help investors compare the true value of tax-free municipal bonds with taxable investments. Whether you're evaluating municipal bonds, treasury securities, or corporate bonds, this calculator shows exactly how much a taxable investment would need to yield to match the after-tax return of a tax-exempt bond.

What Is Tax-Equivalent Yield (TEY)?

Tax-equivalent yield is the pre-tax yield that a taxable bond must offer to produce the same after-tax return as a tax-free municipal bond. Because municipal bond interest is exempt from federal income tax (and often state tax for in-state bonds), their stated yields appear lower than taxable alternatives. TEY levels the playing field so investors can make apples-to-apples comparisons.

How Is Tax-Equivalent Yield Calculated?

The formula is straightforward:

TEY = Tax-Free Yield ÷ (1 − Marginal Tax Rate)

For example, if you hold a municipal bond yielding 3.50% and you're in the 24% federal tax bracket:

• TEY = 3.50% ÷ (1 − 0.24) = 3.50% ÷ 0.76 = 4.61%
• This means a taxable bond would need to yield at least 4.61% to match the muni bond's after-tax return

When state taxes are included, the combined marginal rate increases, making the tax-equivalent yield even higher.

How to Use This Calculator

1. Enter Tax-Free Yield: Input the annual yield of the tax-exempt investment (typically a municipal bond coupon rate or current yield).
2. Select Your Tax Bracket: Choose your marginal federal income tax rate from the 2026 bracket dropdown, or select "Custom Rate" for a specific rate.
3. Add State Tax (Optional): If the bond is also exempt from state tax, enter your state income tax rate for a more accurate comparison.
4. Compare a Taxable Yield (Optional): Enter a taxable bond yield to see a side-by-side analysis of both investments.
5. Set Investment Amount (Optional): Enter a dollar amount to see annual income projections for both options.

Why Do Higher Tax Brackets Benefit More?

The higher your marginal tax rate, the more valuable tax exemption becomes. A 3.50% muni bond is equivalent to:

• 3.89% in the 10% bracket
• 4.61% in the 24% bracket
• 5.56% in the 37% bracket

This is why municipal bonds are particularly attractive for high-income investors — they effectively earn higher returns because they avoid larger tax bills.

When Should You Choose Municipal Bonds?

• High marginal tax rate: If you're in the 24% bracket or above, munis often provide better after-tax returns.
• In-state bonds: Buying bonds from your home state may exempt you from both federal and state taxes ("double tax-free").
• Tax-deferred accounts are full: If you've maxed out 401(k) and IRA contributions, munis offer tax efficiency in taxable accounts.
• Seeking stable income: Municipal bonds typically have lower default rates than corporate bonds of similar yield.

Important Considerations

• AMT risk: Some private activity municipal bonds may be subject to the Alternative Minimum Tax.
• Capital gains: While interest is tax-free, selling a muni bond at a profit may still trigger capital gains tax.
• Credit risk: Not all munis are created equal. Higher-yielding munis may carry more credit risk.
• Opportunity cost: Consider total return (interest + price appreciation), not just yield.

Frequently Asked Questions

What is tax-equivalent yield?

Tax-equivalent yield (TEY) is the yield a taxable bond would need to offer to produce the same after-tax income as a tax-free municipal bond. It accounts for the investor's marginal tax rate to provide a fair comparison between taxable and tax-exempt securities.

How is tax-equivalent yield calculated?

The formula is: TEY = Tax-Free Yield ÷ (1 − Marginal Tax Rate). For combined federal and state taxes, the effective rate used is: Combined Rate = Federal Rate + State Rate − (Federal Rate × State Rate).

Why do higher tax brackets benefit more from muni bonds?

Higher tax brackets mean you pay a larger percentage of investment income in taxes. Tax-free bonds let you avoid this larger tax bite, making their effective yield significantly higher compared to what you'd keep from a taxable bond.

Should I include state taxes in the calculation?

Yes, if the municipal bond is exempt from your state's income tax (typically for in-state bonds). Including state taxes raises the tax-equivalent yield and gives a more accurate comparison.

Are all municipal bonds tax-free?

Most general obligation and essential-service revenue bonds are exempt from federal income tax. However, some private activity bonds may be subject to the AMT. Always check the bond's tax status before investing.