Tax-Equivalent Yield Calculator
Compare tax-free municipal bonds to taxable bonds on an apples-to-apples basis. Enter the muni yield, your marginal tax rates, and a taxable bond yield to see which gives you more after-tax income.
Municipal bonds pay interest that is exempt from federal income tax and often from state tax too (if you buy bonds issued in your state). This tax advantage makes munis look better than their stated yield suggests, especially for investors in higher tax brackets.
The tax-equivalent yield formula is: TEY = Muni Yield / (1 - Marginal Tax Rate). For example, a 3.5% muni bond for someone in the 24% federal bracket plus 5% state bracket has a tax-equivalent yield of about 5.07%. That means a taxable bond would need to yield 5.07% to match the muni's after-tax income.
When Munis Make Sense
The higher your tax bracket, the more valuable the tax exemption becomes:
- 10-12% bracket: A 3.5% muni equals about 3.9-4.0% taxable. Munis rarely win here.
- 22-24% bracket: A 3.5% muni equals about 4.5-5.1% taxable. Getting competitive.
- 32-37% bracket: A 3.5% muni equals about 5.1-5.6% taxable. Munis usually win.
Always compare the TEY to actual taxable bond yields available in the market. If Treasury bonds yield 4.8% and your TEY on a comparable muni is 5.1%, the muni is the better deal. If Treasuries yield 5.5%, the taxable bond wins despite the tax bite.
Tip: If you hold bonds in a tax-advantaged account (IRA, 401k), use taxable bonds there since you already have tax shelter. Save munis for your taxable brokerage account where the tax exemption has value.