Taxable Equivalent Yield Calculator
A 4% tax-free muni bond can beat a 5.5% taxable bond once taxes take their cut, but only if your bracket is high enough for the exemption to matter. This calculator finds the exact taxable yield you would need to match a tax-free yield, using your combined federal, state, and local marginal rates, then puts a real taxable bond head to head against it so you can see the winner in after-tax dollars.
Quick Answer
A 3.5% muni at a 37% combined marginal rate needs a 5.56% taxable yield to match it: 3.5 ÷ (1 − 0.37) = 5.56%. Against a real 5.2% corporate bond, the muni wins, paying $350 per $10,000 after tax versus $327.60. Enter your yield and your rates above for the same head-to-head verdict.
Key takeaways
- Taxable equivalent yield = tax-free yield ÷ (1 − combined marginal tax rate). It grosses the muni up to the taxable yield that leaves you the same after-tax income.
- Always use your marginal rate, the rate on your next dollar of income. The effective rate understates the tax bite and makes the muni look weaker than it is.
- If you itemize, state and local taxes are deductible federally, so the honest combined rate is federal + (state + local) × (1 − federal). The checkbox applies it.
- The exemption is worth more the higher your bracket: a 4% muni equals 4.55% taxable at 12%, but 6.35% taxable at 37%.
- TEY prices only the tax difference. It says nothing about credit risk, interest-rate risk, or liquidity, so use it as a filter before you compare bonds, not as a buy signal.
- Quick Answer
- How to use the taxable equivalent yield calculator
- How taxable equivalent yield works
- Worked example, verified against the tool
- What a 4% muni needs at each bracket
- The itemizer question: when the adjustment is honest
- The honest part: when munis lose
- What competing TEY calculators miss
- Frequently asked questions
- Add This Calculator to Your Website
- References
How to use the taxable equivalent yield calculator
Enter the muni yield and your marginal rates, optionally name a real taxable bond, and read the verdict. The results stay hidden until you calculate.
- Enter the tax-exempt yield: the muni’s annual yield as a percent. The 3.5% example is pre-filled.
- Enter your federal marginal rate, or pick your bracket from the 2026 preset and let it fill the field. Add state and local rates only for taxes the muni actually escapes.
- Tick “I itemize deductions” if you itemize and your state and local taxes are still deductible against federal tax. Leave it unticked if you take the standard deduction.
- Optionally enter a taxable bond yield for the head-to-head comparison. The 5.2% example is pre-filled.
- Click Calculate: the taxable-equivalent yield appears with the working, a line-by-line table, after-tax income per $10,000 for each side, and the verdict.
Invalid inputs are rejected with a plain message: a missing or non-positive muni yield, a missing or negative federal rate, a federal rate of 100% or more, negative state or local rates, a combined rate at or above 100%, and a non-positive comparison yield. Blank state and local rates are treated as zero.
How taxable equivalent yield works
A taxable bond keeps only (1 − your tax rate) of what it pays, so to leave you the same after-tax income as a tax-free bond it must pay more up front. Dividing by that retention factor is the whole calculation.
Combined rate = federal + state + local (each marginal, as a decimal)
Itemizer version = federal + (state + local) × (1 − federal)
Reverse direction: after-tax yield = taxable yield × (1 − combined rate). The after-tax yield calculator runs that direction on its own page.
The itemizer version exists because itemizers deduct state and local taxes on the federal return, so each state-tax dollar costs less than a dollar after the federal deduction. With 32% federal and 5% state, the plain combined rate is 37%, but the itemizer-adjusted rate is 32% + 5% × (1 − 32%) = 35.4%, and the TEY drops from 5.56% to 5.42%. The checkbox applies exactly that adjustment.
Worked example, verified against the tool
Type these figures into the calculator and every number below appears verbatim in the results.
Tick the itemizer box with the same inputs and watch the combined rate fall to 35.4%: the TEY becomes 5.42%, the corporate bond’s after-tax yield rises to 3.36% ($335.92 per $10,000), and the muni still wins, by a smaller margin. That is the adjustment doing its job: the deduction makes the state tax cheaper, so the exemption is worth slightly less.
What a 4% muni needs at each bracket
The pattern is the whole point of the calculation: the higher your bracket, the harder a taxable bond has to work to keep up. Every row is a real run of this calculator with state and local rates at zero.
| Your federal marginal rate | Taxable yield needed to match a 4% muni | What it means |
|---|---|---|
| 10% | 4.44% | The exemption is worth 0.44 points; most taxable bonds clear it. |
| 12% | 4.55% | Still a small edge; compare on risk and liquidity first. |
| 22% | 5.13% | A 5.3% corporate bond beats the muni here. |
| 24% | 5.26% | The muni starts looking competitive against investment-grade corporates. |
| 32% | 5.88% | The exemption is worth 1.88 points of yield. |
| 35% | 6.15% | Taxable bonds need a serious premium to compete. |
| 37% | 6.35% | At the top bracket the 4% muni behaves like a 6.35% taxable bond. |
The itemizer question: when the adjustment is honest
Tick the box when you itemize and your state and local taxes are actually deductible. Leave it unticked when you take the standard deduction, because then no state-tax dollar buys you a federal deduction.
There is a wrinkle worth knowing. The state-and-local-tax (SALT) deduction is capped, $40,400 for 2026, so a high earner already at the cap gets no federal deduction for one more dollar of state tax. For that taxpayer the honest combined rate is the plain federal + state + local, and the unticked box is correct. The ticked box is correct for the itemizer still under the cap, whose marginal state-tax dollar genuinely reduces federal taxable income. When you are unsure, run it both ways: the tool shows you both combined rates, and the difference tells you exactly how much the deduction question matters for your decision.
The honest part: when munis lose
Taxable equivalent yield flatters muni bonds by design, because it prices in your tax rate. In low brackets the exemption is worth little: at 12%, a 4% muni only needs a 4.55% taxable yield to match, and plenty of corporate bonds and even high-yield savings accounts clear that bar. The high-yield savings calculator is a useful reality check there, since savings interest is fully taxable and the comparison is apples to apples.
Also remember the formula assumes the comparison is otherwise equal, and it never is. Corporate bonds usually carry more credit risk; munis can be less liquid; and some “tax-exempt” interest still faces state tax or the alternative minimum tax (private-activity bond interest can count for AMT purposes). High earners should also note the 3.8% net investment income tax, which can apply to taxable bond interest on top of the income-tax rate. And none of this replaces asset allocation: where bonds sit in your portfolio matters as much as which bond wins, which is the stock-bond ratio calculator‘s territory. Use the TEY as the starting filter, then compare risk, duration, and fees before you buy anything.
What competing TEY calculators miss
Muni comparison tools fall into a few camps, and each leaves something out:
- Bare formula tools: the TEY division and nothing else. No state or local rates, no itemizer logic, no head-to-head bond comparison, no verdict. You get a number and do the rest by hand.
- Yield-to-maturity-first tools: strong at deriving a muni’s yield from price and coupon, which is genuinely useful for below-par purchases, but then they stop at the TEY figure with no comparison bond and no after-tax dollar amounts.
- Fixed-assumption tools: some always shrink the state piece by (1 − federal), others never do. Neither asks whether you itemize or whether the SALT cap binds you, so the combined rate is right for some users and wrong for others with no way to tell.
- Dollar-perspective tools: a few show the equivalent taxable income in dollars, which is a nice touch, but without the itemizer choice or a verdict against a named bond.
- Explainers without tools: excellent write-ups of the formula, the NIIT angle, and AMT exceptions, but no calculator to test your own numbers against.
- The gap this page fills: the 2026 federal bracket preset so you never look up your rate, the itemizer checkbox with the honest SALT-cap framing above, the head-to-head verdict with after-tax dollars per $10,000, and the Treasury shortcut (federal rate in, state and local at zero).
Frequently asked questions
It is the interest rate a taxable bond must pay so that, after you pay tax on it, you keep exactly as much as a tax-free bond pays. If the TEY is 5.56%, any taxable bond paying less leaves you poorer than the muni.
Marginal: the rate on your next dollar of investment income. The effective (average) rate understates the tax bite on new income and makes the TEY look lower than it really is.
Your marginal bracket is the rate on your next dollar of income. The calculator’s 2026 federal bracket preset covers all seven federal rates (10%, 12%, 22%, 24%, 32%, 35%, 37%): pick yours and it fills the federal rate field. Your bracket depends on filing status and taxable income, so check the IRS tables for your situation; the calculator only needs the rate.
Itemizers deduct state and local taxes on their federal return, so each state-tax dollar costs less than a dollar. The combined rate falls (35.4% instead of 37% in the example above), which lowers the TEY. It only applies if your state and local taxes are actually deductible: the SALT cap binds most high earners.
No. Most are exempt from federal tax, but many are taxable at the state level unless issued in your home state, and some trigger the alternative minimum tax. Enter only the taxes the bond actually escapes.
They are two directions of the same math. TEY grosses a tax-free yield up to its taxable equivalent; after-tax yield nets a taxable yield down to what you keep. The tool shows both when you enter a comparison bond.
Yes, with care. Treasuries are exempt from state and local tax but not federal tax, so enter your federal rate and leave state and local at zero. The tool then compares correctly.
It means the muni wins on after-tax income at your tax rate. It says nothing about default risk, interest-rate risk, or liquidity, so treat it as a filter, not a buy signal.
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References
- American Association of Individual Investors. Calculating the Tax-Equivalent Yield of Muni Bonds (TEY formula, worked example, net investment income tax adjustment to a 40.8% rate). Accessed October 24, 2026.
- U.S. Securities and Exchange Commission, Investor.gov. Municipal Bonds (what munis are, federal and state tax exemption, general obligation vs revenue bonds, risks). Accessed October 24, 2026.
- Cornell Law School, Legal Information Institute. Municipal Bonds (Internal Revenue Code §103 exclusion, private activity and arbitrage bond exceptions, state tax variation, credit and liquidity risks). Accessed October 24, 2026.
- E*TRADE. Introduction to Municipal Bonds (federal, state, and triple tax-exempt treatment; capital gains on sale remain taxable). Accessed October 24, 2026.
- SDO CPA. 2026 Standard Deduction and Tax Brackets (2026 SALT deduction cap of $40,400; standard deduction by filing status). Accessed October 24, 2026.
- Tom Talks Taxes. 2026 Inflation-Adjusted Amounts Released (revised §68 itemized-deduction limitation capping the benefit at 35% in the top bracket). Accessed October 24, 2026.
- KPMG TaxNewsFlash. Revenue Procedure 2025-32: Inflation Adjustments for 2026, Individual Taxpayers (2026 federal bracket thresholds behind the preset: 10% through 37%). Accessed October 24, 2026.
- CertFuel Series 7 Study Guide. Investment Returns and Tax Treatment (muni vs Treasury vs agency tax treatment; 3.8% NIIT surtax on investment income). Accessed October 24, 2026.
- Open Exam Prep. Taxable vs. Tax-Exempt Interest (tax-exempt interest reported on Form 1040 line 2a; private activity bonds and AMT). Accessed October 24, 2026.
- New York State Society of Certified Public Accountants. IRS Releases 2026 Inflation Adjustments and Tax Brackets (Revenue Procedure 2025-32 summary; 60+ adjusted provisions). Accessed October 24, 2026.