Tax-Equivalent Yield Calculator
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Tax-Equivalent Yield4.29%
Combined Tax Rate30.00%
Tax-Free Yield (kept)3.00%
The Tax-Equivalent Yield Calculator translates a tax-free municipal bond yield into the pre-tax yield a taxable bond would need to deliver the same after-tax income. Because muni interest escapes federal (and sometimes state) tax, a modest tax-free coupon can beat a higher taxable one once your marginal bracket is factored in. Enter the muni yield and your tax rates to see the apples-to-apples taxable yield you should demand instead.
Formula
TEY = taxFreeYield / (1 − combinedRate)
- taxFreeYield
- Yield on the tax-exempt (municipal) bond, in percent
- combinedRate
- Federal plus applicable state marginal tax rate, as a decimal
- TEY
- Equivalent pre-tax yield a taxable bond must offer
How it works
- Enter the tax-free yield offered by the municipal bond or fund you are evaluating.
- Enter your federal marginal tax rate, and a state rate if the bond is also exempt from state income tax; the tool sums them into a combined marginal rate.
- It divides the tax-free yield by one minus that combined rate, giving the taxable yield that would leave you with the same income after taxes.
Worked example
A municipal bond yields 3% and you are in the 24% federal bracket with a 6% state tax it is also exempt from.
- Combined marginal rate = 24% + 6% = 30%.
- TEY = 3% ÷ (1 − 0.30) = 3% ÷ 0.70.
- TEY ≈ 4.29%.
A taxable bond would need to yield about 4.29% to match the 3% tax-free yield.
Frequently asked questions
- When does a lower tax-free yield beat a higher taxable yield?
- Whenever the tax-equivalent yield exceeds the taxable alternative. The higher your marginal bracket, the more a tax-free yield is worth, so high earners often come out ahead on munis even at lower stated coupons.
- Should I include my state tax rate?
- Include it only if the bond is exempt from your state income tax, which is typically the case for bonds issued within your own state. For out-of-state munis, use the federal rate alone.
- Does this account for the alternative minimum tax or NIIT?
- No. This is a straightforward marginal-rate estimate. Certain private-activity muni bonds can trigger AMT, and high earners may owe the net investment income tax on taxable interest, so consult a tax advisor for precise planning.
- What marginal tax rate should I enter?
- Use the rate that applies to your next dollar of ordinary income, not your average effective rate. Bond interest is taxed at ordinary income rates, so your top federal bracket is the right figure.