Tax Equivalent Yield Calculator

Convert a tax-free municipal bond yield into its taxable-equivalent yield (TEY) using your federal and state marginal tax rates, then compare it against a taxable bond's after-tax return.

Quick Facts

Formula
TEY = Tax-Free Yield / (1 − Tax Rate)
The tax rate used is your combined federal-plus-state rate for double tax-exempt bonds, or just your federal rate when only federal tax is exempt.
Combined rate
1 − (1 − Fed) × (1 − State)
This is the standard approximation for stacking federal and state marginal tax rates, not a simple sum.

Your Results

Calculated
Taxable-Equivalent Yield
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Pretax yield a taxable bond would need
Effective tax rate used
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Rate applied in the TEY formula
After-tax yield of taxable bond
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Your comparison bond, after tax
Tax-free bond advantage
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After-tax yield difference

Ready

Enter the tax-free yield, your tax rates, and a comparison taxable yield, then press Calculate.

How the Tax Equivalent Yield Calculator works

Municipal bonds usually pay a lower stated interest rate than corporate or Treasury bonds because their interest is exempt from federal income tax (and often state tax too). To compare a tax-free muni against a fully taxable bond, you need to know what pretax yield the taxable bond would have to offer to match the muni's after-tax return. That number is the taxable-equivalent yield (TEY).

The formula

TEY = Tax-Free Yield / (1 − Tax Rate)

The tax rate depends on the bond's exemption status. If the bond is exempt from both federal and state income tax — typically a municipal bond issued by your own state of residence — the calculator uses a combined marginal rate: Combined Rate = 1 − (1 − Federal Rate) × (1 − State Rate). If the bond is exempt from federal tax only — typically an out-of-state municipal bond, which still owes tax to your home state — only the federal rate is used, since the state tax burden is the same whether you hold the muni or a taxable alternative.

Worked example

Take a 4.00% tax-free municipal bond for an investor in the 24% federal bracket and 5% state bracket, with the bond exempt from both taxes. The combined rate is 1 − (0.76 × 0.95) = 27.8%. The taxable-equivalent yield is 4.00% / (1 − 0.278) ≈ 5.54%. A taxable bond would need to pay about 5.54% before tax just to match what the 4.00% muni already pays after tax.

Comparing against an actual taxable bond

Knowing the TEY only tells half the story — you also want to know how a specific taxable bond you're considering stacks up. The calculator takes a comparison taxable yield, applies the full combined federal-and-state rate (since a fully taxable bond owes both), and shows its after-tax yield next to the muni's after-tax yield. Whichever number is higher provides more spendable income for the same amount invested, before factoring in credit quality, call risk, or maturity differences.

What moves the taxable-equivalent yield most

  • Marginal tax bracket: the higher your combined tax rate, the more a tax exemption is worth, and the higher the taxable-equivalent yield climbs relative to the stated tax-free rate.
  • State tax exemption: an in-state muni's double exemption raises the TEY more than an out-of-state muni with the same stated yield, because more of the return would otherwise be taxed away.
  • The tax-free yield itself: TEY scales linearly with the stated yield — doubling the tax-free rate doubles the taxable-equivalent yield at a fixed tax rate.

Limitations

This is a pretax yield comparison only. It assumes your marginal tax rate stays constant, ignores the Alternative Minimum Tax treatment that applies to some private-activity municipal bonds, and does not account for credit risk, liquidity, call provisions, or price volatility. Use it to compare stated yields on an apples-to-apples tax basis, not as investment advice.

Frequently Asked Questions

How do you calculate taxable-equivalent yield?
Taxable-equivalent yield (TEY) is calculated as TEY = tax-free yield / (1 - tax rate). The tax rate is your combined federal and state marginal rate if the bond is exempt from both, or just your federal rate if only the federal tax is exempt. For example, a 4% tax-free yield for someone in a 24% federal bracket gives a TEY of 4% / (1 - 0.24) = 5.26%, meaning a taxable bond would need to pay 5.26% before tax to match the muni's after-tax return.
What is the difference between federal-only and double tax-exempt bonds?
A municipal bond issued by your state of residence is typically exempt from both federal and state income tax (double tax-exempt), so both rates are used to gross up the yield. A municipal bond issued by another state is usually exempt from federal tax only — you still owe state tax on the interest — so only the federal rate is used when computing its taxable-equivalent yield.
How is the combined federal and state tax rate calculated?
The combined rate is not a simple sum. The standard approximation is combined rate = 1 - (1 - federal rate) x (1 - state rate). For a 24% federal rate and 5% state rate, the combined rate is 1 - (0.76 x 0.95) = 27.8%, not 29%.
Does a higher taxable-equivalent yield always mean the municipal bond is the better choice?
Not necessarily. TEY is a pretax comparison of yield only — it does not account for credit risk, call provisions, liquidity, or changes in your tax bracket over the bond's life. A muni and a corporate bond with similar credit ratings and maturities are reasonable to compare this way, but always weigh the non-yield differences before choosing between them.

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