Tax-Equivalent Yield Calculator

Tax-equivalent yield (TEY) is the pre-tax return a taxable bond must offer to match the after-tax return of a tax-exempt municipal bond for a given investor. Because municipal bonds issued by state and local governments are generally exempt from federal income tax — and often from state and local taxes too — their stated yields appear lower than comparable taxable bonds. The tax-equivalent yield calculator converts that lower tax-free yield into an apples-to-apples taxable number so you can compare both options accurately.

Without this conversion, investors in high tax brackets routinely underestimate the attractiveness of municipal bonds. A 4% muni yield and a 6% corporate bond yield do not compete on equal terms if you sit in the 32% federal bracket. Once you translate the 4% muni to its tax-equivalent yield of roughly 6.3%, you can see that the two bonds are nearly identical after taxes — and the muni may actually win once state taxes are included.

Tax-equivalent yield is one of the most practically useful metrics in fixed-income investing. It places tax-exempt and taxable bonds on a common footing, cutting through the confusion that arises when comparing yields across different tax treatments. Investors who skip this calculation risk choosing the wrong bond and leaving measurable after-tax income on the table every year.

This calculator goes beyond the basic federal-only formula. It incorporates your state income tax rate and uses the correct combined marginal rate formula — accounting for the fact that state taxes are often deductible on your federal return — so the resulting tax-equivalent yield reflects your real-world situation, not just a textbook approximation.

The core formula for tax-equivalent yield divides the tax-exempt yield by one minus the relevant marginal tax rate. When both federal and state taxes are involved, the calculation first derives a combined marginal rate that correctly accounts for the partial offset between federal and state tax obligations.

The combined marginal rate formula adjusts for the fact that state income taxes may be deductible on your federal return, reducing the effective cost of state taxes. Rather than simply adding federal and state rates, the formula multiplies the state rate by the after-federal-tax factor, then adds the federal rate:

Combined Rate = Federal Rate + State Rate × (1 − Federal Rate)

For example, with a 24% federal rate and a 5% state rate: Combined Rate = 0.24 + 0.05 × (1 − 0.24) = 0.24 + 0.038 = 0.278, or 27.8%.

The tax-equivalent yield is then calculated by dividing the tax-exempt yield by one minus this combined rate. A higher combined tax rate increases the tax-equivalent yield, making tax-exempt bonds relatively more attractive. Investors in states with no income tax will see a lower TEY because the combined rate equals the federal rate alone.

Many online tax-equivalent yield tools simply add federal and state rates together, but this overstates your true marginal rate. State income taxes paid during the year are generally deductible on your federal Schedule A if you itemize deductions. The practical effect is that every dollar you pay in state tax reduces your federal taxable income by one dollar — saving you money equal to your federal marginal rate on that state-tax dollar.

The combined marginal rate formula used by this calculator captures that interaction: Combined Rate = Federal Rate + State Rate × (1 − Federal Rate). The term State Rate × (1 − Federal Rate) represents the net effective state tax after accounting for the federal deduction. If you are in the 24% federal bracket and face a 5% state rate, the net state cost is 5% × 76% = 3.8%, yielding a combined rate of 27.8% rather than the naive sum of 29%.

Note that this calculation assumes you itemize federal deductions. If you take the standard deduction — as most taxpayers now do after the 2017 Tax Cuts and Jobs Act doubled the standard deduction — state taxes are not actually deducted and the naive sum would be closer to your true combined rate. However, the formula used here is the standard finance convention and still provides a useful conservative estimate of your combined burden.

Investors in states without an income tax (such as Florida, Texas, or Washington) will find that their combined rate equals their federal rate alone. For these investors, the tax advantage of munis is smaller, and the break-even point with taxable bonds shifts accordingly.

Municipal bonds are not the right choice for every investor. Their tax exemption only adds value if you are in a tax bracket high enough that the after-tax income from a muni beats what you could earn on a comparable taxable bond. The tax-equivalent yield calculation is the definitive test: if the TEY of a muni exceeds the yield of available taxable bonds of similar quality and duration, the muni wins on after-tax income.

As a general rule, municipal bonds become compelling once your combined marginal tax rate exceeds roughly 25–28%. Investors in the 22% federal bracket with no state income tax may find that taxable bonds, corporate bonds, or Treasury securities still offer better after-tax returns. Investors in the 32%, 35%, or 37% federal brackets — especially in high-tax states like California, New York, or New Jersey — often find that high-quality munis handily outperform taxable bonds on an after-tax basis.

Bond quality also matters. Municipal bonds carry credit risk just like corporate bonds, and lower-rated issuers must offer higher yields to attract buyers. When comparing a AAA-rated muni with a BBB-rated corporate bond, a simple yield comparison overstates the corporate bond's attractiveness because it ignores the extra credit risk. Focus on comparing bonds of similar credit quality and maturity when using the tax-equivalent yield calculator for investment decisions.

Tax-deferred accounts such as IRAs and 401(k)s are generally not suitable for holding municipal bonds. Because income inside these accounts is not taxed annually anyway, the tax exemption of munis provides no benefit — you would be accepting a lower yield without gaining any tax advantage. Munis are best held in taxable brokerage accounts where their exemption has real impact on your annual after-tax income.

Using this calculator effectively requires four pieces of information: the yield on the tax-exempt bond you are evaluating, the yield on the taxable bond you are comparing it to, your federal marginal tax rate, and your state marginal income tax rate.

Tax-Exempt Yield: Enter the annual yield advertised for the municipal bond, shown as a percentage. Municipal bond yields are quoted on a tax-exempt basis; a bond quoted at 4.0% pays 4.0% annually and you receive that entire amount free of federal tax.

Taxable Bond Yield: Enter the yield of the corporate bond, Treasury security, or other taxable bond you are considering as an alternative. This is the "comparison" yield the calculator uses to determine which option is better for your bracket.

Federal Marginal Tax Rate: Enter the top federal tax bracket that applies to your ordinary income. For 2025 this is 10%, 12%, 22%, 24%, 32%, 35%, or 37%. If you are unsure, review your most recent tax return or use the IRS tax rate schedules.

State Tax Rate: Enter your state's marginal income tax rate. This varies widely — from 0% in no-income-tax states to over 13% in California for the highest earners. Check your state revenue agency or your prior-year state tax return for accuracy.

The calculator immediately shows your tax-equivalent yield, combined tax rate, the after-tax yield on the taxable bond, and a recommendation indicating which bond produces more after-tax income for your specific situation. The yield comparison table at the bottom shows the federal-only TEY alongside the combined TEY so you can see how much state taxes affect the outcome.

The table below shows illustrative break-even taxable yields for a hypothetical 4% municipal bond across common federal tax brackets and state rates, calculated using the combined marginal rate formula. Investors whose available taxable bond yields exceed the break-even yield should prefer the taxable bond; investors for whom the taxable yield falls below break-even are better off in the muni.

The TEY rises steeply as both federal and state rates increase. A top-bracket investor in California paying the 37% federal rate plus 13.3% state tax needs a taxable bond to yield more than 7.37% just to match a 4% muni — a very high hurdle in most interest-rate environments. This illustrates why high-income investors in high-tax states are the natural buyers of municipal bonds.