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Tax-Equivalent Yield Calculator

Compare a tax-free municipal bond's yield against a taxable bond's yield on an equal, after-tax basis.

Tax-equivalent yield of the muni bond
4.61%
Taxable bond's after-tax yield
3.42%
Better after-tax return
The municipal bond

How it works

Municipal bond interest is exempt from federal income tax, so comparing its stated yield directly to a taxable bond's stated yield understates the muni's real advantage. This calculator puts both on the same after-tax footing.

Tax-equivalent yield is what a taxable bond would need to yield, before tax, to match the muni's tax-free return: taxEquivalentYield = muniYield ÷ (1 − taxRate). Separately, the taxable bond's own after-tax yield is taxableYield × (1 − taxRate) — what it actually nets once tax is withheld. Whichever of the muni's yield and the taxable bond's after-tax yield is higher is the better after-tax return.

The marginal tax rate must be less than 100% — at exactly 100%, every dollar of taxable interest would be taxed away, making the comparison undefined.

FAQ

Should I use my federal rate or my combined federal + state rate?

Use whichever applies to the specific bonds being compared. Many municipal bonds are also exempt from state tax if you live in the issuing state, in which case your combined marginal rate is more accurate; if only federal exemption applies, use your federal rate alone.

Why can a muni bond be the better choice even with a lower stated yield?

Because tax is only subtracted from the taxable bond's return, not the muni's. A municipal bond yielding 3.5% tax-free can out-earn a taxable bond yielding 4.5% once that 4.5% is reduced by your marginal tax rate — this calculator does that comparison directly instead of leaving you to compare the two raw percentages.

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