# Tax-Equivalent Yield Calculator

Calculate the tax-equivalent yield of municipal bonds. Compare tax-free muni bond yields to taxable bonds at your marginal tax rate.

## What this calculates

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.

## Inputs

- **Municipal Bond Yield (%)** (%) — min 0, max 20 — The tax-exempt yield on the municipal bond.
- **Federal Tax Rate (%)** (%) — min 0, max 37 — Your marginal federal income tax bracket.
- **State Tax Rate (%)** (%) — min 0, max 15 — Your state income tax rate (0% if no state tax or out-of-state bond).
- **Investment Amount** ($) — min 0 — Amount you plan to invest (for dollar comparison).
- **Taxable Bond Yield to Compare (%)** (%) — min 0, max 20 — Yield on a taxable bond you are comparing against.

## Outputs

- **Tax-Equivalent Yield** — formatted as percentage — What a taxable bond would need to yield to match the muni.
- **Combined Marginal Tax Rate** — formatted as percentage — Federal + state tax rate used in the calculation.
- **Muni Annual Income (Tax-Free)** — formatted as currency — Annual income from the municipal bond (no tax).
- **Taxable Bond After-Tax Income** — formatted as currency — Annual income from the taxable bond after taxes.
- **Muni Advantage (Annual)** — formatted as currency — How much more (or less) the muni earns after taxes.

## Details

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.

## Frequently Asked Questions

**Q: What tax rate should I use?**

A: Use your marginal (top bracket) federal tax rate, not your effective rate. This is because bond interest is added on top of your existing income, so it gets taxed at the highest bracket. Common rates: 22% ($48k-$103k single), 24% ($103k-$197k), 32% ($197k-$250k), 35% ($250k-$626k), 37% (above $626k). Add your state rate if the muni is exempt from state tax too.

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

A: Most muni bond interest is exempt from federal income tax. If you buy bonds issued in your state, the interest is usually exempt from state tax too. However, some munis (called private activity bonds) may be subject to the Alternative Minimum Tax (AMT). Also, if you sell a muni bond at a profit, the capital gain is taxable. Always check the specific bond's tax treatment.

**Q: Should I buy munis in my IRA or 401(k)?**

A: No. Tax-advantaged accounts (IRA, 401k, Roth IRA) already shelter your investments from taxes. Putting tax-exempt munis in these accounts wastes the tax benefit -- you are getting tax-free income inside an already tax-free account. Hold munis in your taxable brokerage account where the exemption has real value, and use taxable bonds in your retirement accounts.

**Q: Do munis pay less than taxable bonds?**

A: Yes, muni yields are typically 15-30% lower than comparable taxable bonds because the tax exemption has value. The market prices this in. The entire point of TEY analysis is determining whether that lower yield is still a better deal for you after accounting for taxes. For high-bracket investors, the answer is often yes.

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Source: https://vastcalc.com/calculators/finance/tax-equivalent-yield
Category: Finance
Last updated: 2026-04-08