Municipal Bond Tax-Equivalent Yield Calculator

Municipal bond yields look small next to corporate bond or CD yields, and that comparison is misleading on its face. Interest from most municipal bonds is exempt from federal income tax, and often from state income tax too if you buy a bond issued by your home state, so a muni's quoted yield already reflects money you get to keep in full. A taxable bond's quoted yield does not: you have to pay ordinary income tax on every dollar of interest it pays before you can spend or reinvest it. Tax-equivalent yield (TEY) translates a tax-free muni yield into the yield a taxable bond would need to offer to leave you with the same after-tax income, so you can put the two side by side and see which one is actually the better deal for your specific tax situation.

This calculator computes TEY two ways: using only your federal marginal tax bracket, and using a combined federal-plus-state rate that accounts for the fact that state income tax is itself deductible against federal taxable income, the standard combined-rate formula used across the municipal bond industry.

Tax-equivalent yield, the core formula:

$$\text{TEY} = \frac{\text{Tax-Free Yield}}{1 - \text{Marginal Tax Rate}}$$

The intuition: if your marginal tax rate is $t$, a taxable bond only lets you keep $(1-t)$ of every dollar it pays. To match a muni paying you the full tax-free yield, the taxable bond has to pay enough that $(1-t)$ of it equals the muni's yield, which is exactly what dividing by $(1-t)$ solves for.

Combined federal and state marginal rate, when the muni is also exempt from your state's income tax (typically true only for bonds issued by your own state of residence):

$$\text{Combined Rate} = \text{Federal Rate} + \text{State Rate} \times (1 - \text{Federal Rate})$$

State income tax paid is generally deductible when computing federal taxable income, so simply adding federal and state rates together would double-count part of the benefit; multiplying the state rate by $(1 - \text{Federal Rate})$ correctly nets that out. This is the standard combined-rate formula used by brokerage TEY calculators industry-wide.

Using the calculator's own default inputs:

• Municipal bond tax-free yield: 4.00%
• Federal marginal tax bracket: 32%
• State marginal tax rate: 5%

Combined marginal rate = 32% + 5% × (1 − 32%) = 32% + 3.40% = 35.40%. Tax-equivalent yield = 4.00% ÷ (1 − 0.3540) = 4.00% ÷ 0.6460 = 6.1920%. A taxable corporate bond or CD would need to yield 6.1920% before tax, roughly 2.19 percentage points more than the muni's quoted rate, just to leave this investor with the same after-tax income as the 4.00% muni.

If the same investor instead bought an out-of-state muni exempt only from federal tax, not their own state's tax, the combined-rate benefit disappears: TEY using federal rate alone comes out to 4.00% ÷ (1 − 0.32) = 5.8824%, about 31 basis points lower than the double-exempt figure. That 31-basis-point gap is the calculator's "Added TEY From State Tax Exemption" figure, purely the value of buying a bond that's also exempt from your home state's tax.

Tax-equivalent yield is not a property of the bond; it is a property of the bond combined with your specific tax bracket. The exact same 4.00% muni is worth 6.1920% pre-tax to an investor in the 32%-federal-plus-5%-state example above, but only 4.44% pre-tax to someone in the 10% federal bracket paying no state tax, since 4.00% ÷ (1 − 0.10) = 4.44%. This is why municipal bonds are marketed heavily to high earners and largely ignored by lower-bracket investors: the tax benefit scales directly with how much tax you'd otherwise owe.

• The Alternative Minimum Tax (AMT). Interest from certain "private activity" municipal bonds is not exempt from AMT even though it's exempt from regular federal income tax; this calculator assumes a standard, non-AMT muni.
• The federal SALT deduction cap. Since 2018, the federal deduction for state and local taxes has been capped, which can reduce the practical benefit of the state-tax-deductibility assumption baked into the combined-rate formula, especially for high-income filers who are already at the cap for other reasons.
• Credit risk and call risk. TEY is a pure tax-arithmetic conversion; it says nothing about the muni issuer's creditworthiness or whether the bond can be redeemed early by the issuer.
• Net Investment Income Tax (NIIT). High earners may owe an additional 3.8% NIIT surtax on investment income above certain thresholds; that surtax generally does not apply to muni interest itself but this calculator does not model NIIT on the taxable-bond comparison side.
• Capital gains or losses from selling the bond before maturity. This calculator compares yields only, not total return including price changes.

• Using your average tax rate instead of your marginal rate. TEY should use the marginal rate on your next dollar of taxable income, since that's the rate a taxable bond's interest would actually be taxed at, not your blended average rate across all your income.
• Applying the state-tax exemption to an out-of-state bond. Most states only exempt interest from bonds issued within that state; a muni from another state is typically still taxable at the state level, so use the federal-only TEY figure for those.
• Forgetting AMT exposure on private activity bonds. Some munis, especially those financing airports, hospitals, or housing projects, carry an AMT preference item that can erase part of the tax benefit for AMT-exposed investors.
• Assuming TEY makes munis better for everyone. The whole point of the calculator is that TEY only exceeds the muni's own yield meaningfully once your marginal rate is high enough; at low tax brackets the tax-equivalent yield can be close enough to a comparable taxable bond that the muni is not obviously better.

• Internal Revenue Service, IRC §103, tax exemption for state and local bond interest.
• Internal Revenue Service, Rev. Proc. 2025-32, 2026 federal income tax brackets.
• Municipal Securities Rulemaking Board (MSRB), EMMA, municipal bond disclosure and tax treatment guidance.
• U.S. Securities and Exchange Commission, Investor.gov, municipal bonds overview.