About Municipal Bond Calculator
Municipal bonds (munis) are debt securities issued by states, cities, counties, and other governmental entities to fund public projects. The key advantage of municipal bonds is that the interest income is typically exempt from federal income taxes and, in many cases, state and local taxes as well.
This calculator helps you compare the true value of a tax-free municipal bond investment against taxable alternatives by calculating the tax-equivalent yield - the yield a taxable bond would need to provide to match the after-tax return of a municipal bond.
Understanding Tax-Equivalent Yield
The tax-equivalent yield formula accounts for the tax savings you receive from municipal bonds:
Tax-Equivalent Yield = Muni Yield / (1 - Tax Rate)
Muni Yield = Municipal bond yield as decimal
Tax Rate = Your marginal tax rate as decimal
When Municipal Bonds Make Sense
- High tax brackets: The higher your tax rate, the more valuable the tax exemption becomes
- Taxable accounts: Munis are most beneficial in non-retirement accounts where you pay taxes on interest income
- State residency: Bonds issued in your state often provide triple tax-free income (federal, state, and local)
- Income-focused investing: If you need regular income and want to minimize tax liability
Important Considerations
- Some municipal bonds may be subject to Alternative Minimum Tax (AMT)
- Credit quality varies significantly between issuers
- Interest rate risk affects all bonds - prices fall when rates rise
- Municipal bonds in retirement accounts lose their tax advantage