# Tax-Equivalent Yield Calculator

> Calculate the taxable equivalent yield of a municipal bond — find out what return a taxable bond must earn to match a tax-free municipal bond after taxes.

**Category:** Finance
**Keywords:** tax equivalent yield, municipal bond, muni bond, tax free bond, taxable equivalent, bond yield comparison, after tax yield, tax exempt, bond calculator, fixed income
**URL:** https://complete.tools/tax-equivalent-yield-calculator

## How it calculates

The core formula is straightforward:

**Tax-Equivalent Yield = Tax-Free Yield / (1 - Combined Tax Rate)**

The combined tax rate accounts for both federal and state taxes. Because state income taxes are deductible against federal income for taxpayers who itemize, the combined rate is not simply the sum of the two rates. Instead, the calculator uses:

**Combined Tax Rate = Federal Rate + State Rate - (Federal Rate x State Rate)**

This prevents double-counting the tax benefit. For example, if your federal rate is 24% and your state rate is 5%, the combined rate is 0.24 + 0.05 - (0.24 x 0.05) = 0.278, or 27.8%.

When a taxable bond yield is provided for comparison, the calculator also computes:

**After-Tax Taxable Yield = Taxable Yield x (1 - Combined Tax Rate)**

This lets you directly compare the after-tax income from a taxable bond to the tax-free income from the muni bond.

## Who should use this

This tool is most valuable for investors in higher federal tax brackets (22% and above) who are evaluating fixed-income investments. Specifically, it is useful for individual investors deciding between municipal bonds and corporate or Treasury bonds, financial advisors comparing bond options for clients in different tax situations, retirees seeking tax-efficient income from their portfolios, and residents of high-tax states who want to see the combined impact of federal and state taxes on bond yields. If you are in a low tax bracket or pay no state income tax, the tax advantage of muni bonds may be smaller, and a taxable bond could offer better total returns. This calculator helps you determine exactly where that breakeven point falls.

## Worked examples

**Example 1: Basic federal-only calculation**
A muni bond yields 3.5% and the investor is in the 24% federal tax bracket with 0% state tax.
Combined tax rate = 24%.
Tax-equivalent yield = 3.5% / (1 - 0.24) = 3.5% / 0.76 = 4.61%.
A taxable bond must yield at least 4.61% to match the muni bond after taxes. On a $10,000 investment, the muni earns $350 per year tax-free, while a taxable bond earning 4.61% would generate $461 in pre-tax income but only $350.36 after paying 24% in federal taxes.

**Example 2: Federal plus state taxes**
A muni bond yields 3.0% and the investor pays 32% federal and 6% state income tax.
Combined tax rate = 0.32 + 0.06 - (0.32 x 0.06) = 0.3608, or 36.08%.
Tax-equivalent yield = 3.0% / (1 - 0.3608) = 3.0% / 0.6392 = 4.69%.
Here the higher combined tax rate makes the muni bond even more attractive relative to taxable alternatives.

**Example 3: Comparing against a specific taxable bond**
A muni bond yields 3.5%, the investor is at 24% federal and 5% state (combined 27.8%), and a corporate bond yields 5.0%.
Tax-equivalent yield of the muni = 3.5% / (1 - 0.278) = 4.85%.
After-tax yield of the corporate bond = 5.0% x (1 - 0.278) = 3.61%.
Since 3.61% (taxable after-tax) exceeds 3.5% (muni), the taxable bond is slightly better in this case by 0.11 percentage points.

## Limitations

This calculator makes several simplifying assumptions that investors should be aware of. First, it assumes the municipal bond interest is fully exempt from both federal income tax and the applicable state income tax. In practice, some muni bonds are subject to the Alternative Minimum Tax (AMT), and out-of-state muni bonds may not be exempt from your state's income tax. Second, the combined tax rate formula assumes the investor itemizes deductions and can deduct state taxes against federal income. Under the Tax Cuts and Jobs Act, the state and local tax (SALT) deduction is capped at $10,000, which may reduce the benefit for some taxpayers. Third, the calculator does not account for differences in credit risk, duration, liquidity, or call features between municipal and taxable bonds. A muni bond and a corporate bond with the same yield may carry very different levels of risk. Fourth, capital gains from selling bonds before maturity are taxed differently and are not included in this yield comparison. Finally, tax rates and laws change over time, so the analysis reflects only the current tax situation you enter.

## FAQs

**Q:** What is tax-equivalent yield?


**A:** Tax-equivalent yield is the yield a taxable bond must offer to produce the same after-tax income as a tax-exempt municipal bond. It accounts for the fact that muni bond interest is not subject to federal (and often state) income tax, making it a fair apples-to-apples comparison.


**Q:** Which federal tax rate should I use?


**A:** Use your marginal tax rate, which is the rate applied to your last dollar of income. This is the rate that would apply to additional bond interest income. It is not the same as your effective (average) tax rate. Common federal brackets include 22%, 24%, 32%, 35%, and 37%.


**Q:** My state has no income tax. What should I enter?


**A:** Enter 0% for the state income tax rate. States with no income tax include Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.


**Q:** Are all municipal bonds tax-free?


**A:** No. Most muni bonds are exempt from federal income tax, but some (particularly private activity bonds) may be subject to the Alternative Minimum Tax. Additionally, muni bonds issued by states other than your own may not be exempt from your state income tax. Always verify the tax status of a specific bond before investing.


**Q:** Is a higher tax-equivalent yield always better?


**A:** A higher tax-equivalent yield means the tax benefit of the muni bond is more valuable, but yield is only one factor. You should also consider credit quality, maturity, liquidity, and your overall portfolio strategy. A higher-yielding taxable bond from a risky issuer may not be a fair comparison to a AAA-rated muni bond.


**Q:** How does the SALT deduction cap affect this calculation?


**A:** The $10,000 cap on state and local tax deductions means that if you are already at the cap, your state tax payments may not reduce your federal taxable income. In that case, the true combined rate is closer to the simple sum of federal and state rates rather than the adjusted formula used here. Consult a tax professional if the SALT cap applies to your situation.

---

*Generated from [complete.tools/tax-equivalent-yield-calculator](https://complete.tools/tax-equivalent-yield-calculator)*