π¦ Taxable-Equivalent Yield Calculator
What a muni yield is really worth to you.
Taxable-equivalent yield
Estimates for planning only, not financial advice.
A 3 percent tax-exempt muni yield is worth 4.85 percent taxable if you are in the 32 percent federal bracket plus 9 percent state. That is the number to compare against corporate bonds and CDs. Munis look boring until you run this math in a high bracket.
How to Use This Calculator
Enter the muni's yield to maturity, your federal marginal bracket, and your state marginal bracket. The calculator returns the taxable yield you would need to match the muni after taxes.
Enter the tax-exempt yield, usually the muni bond's yield to maturity, not its coupon.
Enter your marginal brackets, the rate on your last dollar, not your effective rate. Find yours with our tax bracket finder.
Compare the result against taxable alternatives of similar credit quality and duration.
The Formula
The state piece gets the (1 - federal) haircut because state taxes are deductible against federal only if you itemize and are under the SALT cap; the calculator uses the standard combined formula. Dividing by (1 - t) grosses the yield up: at a 39.32 percent combined rate, each tax-free dollar equals $1.65 of taxable yield. The higher your bracket, the more dramatic the gross-up, which is why munis are a high-bracket instrument.
Worked Example
Muni yielding 3 percent, 32 percent federal, 9 percent state. Combined rate: 0.32 + 0.09 x (1 - 0.32) = 0.32 + 0.0612 = 0.3812, or 38.12 percent. TEY: 3 / (1 - 0.3812) = 3 / 0.6188 = 4.85 percent. A 4.5 percent corporate bond keeps only 4.5 x 0.6188 = 2.78 percent after tax here, so the "low" 3 percent muni wins by a wide margin. In a 12 percent bracket the same muni's TEY is just 3.41 percent and the corporate wins instead.
When Munis Win
| 3% muni vs taxable bond at | 32% bracket winner | 12% bracket winner |
|---|---|---|
| 4.0% corporate | Muni (TEY 4.85%) | Corporate (TEY 3.41%) |
| 5.0% corporate | Corporate | Corporate |
| 3.5% Treasury | Muni | Treasury |
The crossover is the whole story: in the 12 percent bracket the same muni's TEY is only 3.41 percent, so taxable bonds win easily. Munis belong in taxable accounts of high-bracket investors, never in IRAs or 401(k)s where the exemption is wasted. In-state munis add the state exemption; out-of-state munis are usually still state-taxable.
What TEY Misses
TEY compares yields, not risks. Muni issuers can default (ask Detroit or Puerto Rico bondholders), and muni liquidity is thinner than Treasury liquidity. Also watch the alternative minimum tax: some private-activity muni interest counts for AMT. And TEY assumes you actually itemize the state deduction mechanics it models; if you take the standard deduction, the state piece is not deductible and the true TEY is a touch lower. For the full bond picture, run yields through our yield to maturity calculator first.
The Muni Crossover: When Tax-Exempt Wins
The breakeven is one division: divide the muni yield by the taxable yield. If the result is below (1 - your marginal rate), the muni wins. A 3.5 percent muni against a 5 percent taxable bond gives 0.70; any marginal rate above 30 percent makes the muni the better buy. That is why munis live in high-bracket portfolios and rarely in IRAs: inside a tax shelter the exemption is worthless, so taxable bonds win by default.
Two adjustments before you act. First, compare like credit quality: a AAA muni against a junk corporate bond is not a yield comparison, it is a risk comparison wearing a yield costume. Second, mind the alternative minimum tax and state specifics: some "tax-exempt" munis are taxable at the state level if issued elsewhere, and private-activity munis can trigger AMT. The calculator's answer is the starting point; the bond's official statement is the fine print.
The Muni Decision in One Comparison
Taxable-equivalent yield exists for one decision: should this bond be a muni or a taxable? Compute it at your actual marginal rate, federal plus state, because the answer flips with income: at 12 percent, taxable bonds usually win; at 37 percent plus state tax, munis usually win. The crossover sits in the middle brackets, where investors must actually do the math instead of guessing.
Three refinements separate good analysis from rough. First, compare against comparable credit quality and maturity: a muni TEY versus a Treasury yield is apples to oranges on risk. Second, remember the AMT: some private-activity muni income is preference income, which trims the advantage for AMT payers. Third, state matters enormously: in high-tax states like California and New York, in-state munis carry a double exemption that can add a full percentage point to the effective yield. Run the calculator with your real rates, and the muni-versus-taxable question answers itself.
One last check: compare the muni's TEY against your actual alternative, not a generic taxable yield. If your real choice is between a muni fund and a Treasury fund, use the Treasury yield; if it is a corporate bond fund, use that. The right benchmark makes the decision obvious.
Estimates for planning only, not financial advice.
Frequently Asked Questions
What is taxable-equivalent yield?
The taxable yield you would need to match a tax-exempt muni bond after taxes: TEY = tax-exempt yield / (1 - combined marginal rate). A 3 percent muni at a 38 percent combined rate equals 4.85 percent taxable. It is the only fair way to compare munis with taxable bonds.
How do I calculate taxable equivalent yield?
Divide the muni yield by one minus your combined marginal tax rate, where combined = federal + state x (1 - federal). At 32 percent federal and 9 percent state: 3% / (1 - 0.3812) = 4.85%. Use marginal brackets, not effective rates.
When do municipal bonds make sense?
For high-bracket investors holding bonds in taxable accounts. In the 32-37 percent federal brackets, munis routinely beat Treasuries and investment-grade corporates after tax. In the 10-12 percent brackets, taxable bonds almost always win. Never hold munis in an IRA or 401(k).
Are municipal bonds federal tax free?
Interest on most municipal bonds is exempt from federal income tax. In-state munis are usually also exempt from state tax; out-of-state munis generally are not. Capital gains on muni bonds are still taxable, and some private-activity bond interest counts for AMT.
What is the difference between TEY and tax-equivalent spread?
TEY is the grossed-up yield itself. The spread is TEY minus the comparable taxable yield, telling you by how many basis points the muni wins or loses. A positive spread favors the muni; compare spreads across maturities to find the sweet spot.
Do I use marginal or effective tax rate?
Marginal, the rate on your last dollar of income, because the bond interest stacks on top of your existing income. Using the lower effective rate understates the muni's advantage. Our tax bracket finder gives you the marginal figure. If you are near a bracket boundary, run the math both ways: a bond that pushes you into the next bracket earns the higher rate on every dollar of its interest.
Are muni bond funds or individual munis better?
Funds offer diversification and liquidity for small investors; individual bonds held to maturity give certainty of principal. Funds never mature, so rising rates hit their NAV permanently. Either way, run the TEY math before choosing munis over taxable options. One more consideration: fund expenses (often 0.3 to 0.7 percent for muni funds) come straight out of your TEY, so compare net-of-fee yields.
Can munis default?
Yes. Municipal defaults are rarer than corporate defaults but real: Detroit (2013) and Puerto Rico's restructuring imposed major haircuts. Check the rating (AAA to BBB scale) and prefer general obligation or essential-service revenue bonds if safety is the goal. Diversification is the individual investor's best defense: a single muni default can erase years of yield advantage, so own many or use a fund.
What about the alternative minimum tax?
Interest on private-activity municipal bonds (airports, housing projects) can trigger AMT for some investors. If you pay AMT, favor non-private-activity munis or accept a slightly lower yield to avoid the complication. Your broker's bond screener usually flags AMT exposure per bond; check the 'AMT' field before buying, since the after-AMT yield can fall below a taxable bond's.
Should I hold munis in a Roth IRA?
No. Roth accounts are already tax-free, so the muni exemption buys you nothing while you accept the muni's lower yield. Hold your highest-taxed assets (bonds, REITs) in pre-tax accounts and munis only in taxable accounts, in that order of preference.