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Tax Equivalent Yield Calculator

Compare tax-free municipal bonds to taxable bonds.

The Tax Equivalent Yield Calculator is a free financial calculator. Compare tax-free municipal bonds to taxable bonds. Plan your finances accurately and make better economic decisions.
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What Is Tax Equivalent Yield?

Tax Equivalent Yield (TEY) converts a tax-exempt municipal bond yield into the equivalent taxable yield you would need to match the same after-tax return. Because municipal bonds pay interest free from federal income tax (and often state tax), a 4% muni yield is worth significantly more than a 4% corporate bond yield to an investor in a high tax bracket.

This comparison is essential when choosing between municipal and taxable bonds. Without it, you are comparing apples to oranges — a 4% muni yield might outperform a 6% corporate bond once taxes are accounted for, or it might not. TEY makes the comparison honest.

The Formula

Tax Equivalent Yield = Municipal Yield ÷ (1 − Tax Rate)

  • Municipal Yield %: The stated annual yield on the tax-exempt bond
  • Tax Rate %: Your marginal federal income tax rate (the rate on your last dollar of income)
  • Result: The taxable yield a corporate or Treasury bond would need to match the muni's after-tax return

Worked Example

Is This Muni Bond Worth It?

You are in the 32% federal tax bracket and comparing a municipal bond yielding 4.2% versus a corporate bond yielding 6.0%.

TEY = 4.2% ÷ (1 − 0.32) = 4.2% ÷ 0.68 = 6.18%

Conclusion: The muni is equivalent to a 6.18% taxable yield. Since 6.18% > 6.0%, the municipal bond delivers better after-tax income. Choose the muni.

If you were in the 22% bracket instead: TEY = 4.2% ÷ 0.78 = 5.38% — now the corporate bond at 6.0% wins.

Who Benefits Most from Municipal Bonds?

  • High earners (37% bracket): A 4% muni equals a 6.35% taxable yield — the tax shelter is enormous
  • Middle brackets (22–24%): Break-even depends on muni quality and available corporate yields; calculate each case
  • Low earners (10–12%): Municipal bonds rarely make sense — the tax exemption provides little benefit vs. the lower yields munis typically offer
  • State taxes add value: If the muni is also exempt from your state tax, add your state rate to the federal rate before calculating

Common Mistakes

  • Using the wrong tax rate: Use your marginal rate (the top bracket you reach), not your effective (average) rate. The muni exemption saves you tax at the margin.
  • Ignoring state taxes: If the municipal bond is issued in your state, interest is often state-tax-exempt too. Add your state marginal rate to the federal rate for a more accurate TEY.
  • Assuming all munis are equal: Higher-rated (AAA) munis offer lower yields; lower-rated munis offer higher yields with more credit risk. TEY only measures the tax comparison — it does not assess default risk.
  • Forgetting AMT: Some private-activity municipal bonds are subject to the Alternative Minimum Tax. If you pay AMT, the exemption disappears and the TEY formula does not apply to those bonds.

Pro Tip

Add your state marginal income tax rate to your federal rate when calculating TEY for in-state munis. A California resident in the 37% federal bracket + 13.3% state bracket has a combined 50.3% marginal rate — a 4% in-state muni is equivalent to an 8.05% taxable yield. The tax shield at high income levels is far larger than most investors realise.

Frequently Asked Questions

Use your federal marginal income tax rate — the rate that applies to your highest dollar of income. For 2024, the brackets are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Check your prior year tax return (Form 1040) or consult a tax professional if unsure. For the most accurate picture, also include your state marginal rate if the bond is issued in your state.

Not always — it depends entirely on your tax bracket. For investors in high brackets (32%+), munis often win on an after-tax basis. For investors in low brackets (12% or below), corporate bonds typically offer better after-tax yields because munis trade at lower gross yields. Always calculate the TEY for your specific situation before deciding.

TEY converts a tax-exempt yield into an equivalent taxable yield — it tells you what a taxable bond would need to yield to match the muni. After-tax yield converts a taxable yield into what you actually keep after paying taxes — it goes the other direction. Both answer the same question from opposite angles: which bond puts more money in your pocket after tax.

Written and reviewed by the CalcToWork editorial team. Last updated: 2026-04-29.

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Frequently Asked Questions

Use your federal marginal income tax rate — the rate that applies to your highest dollar of income. For 2024, the brackets are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Check your prior year tax return (Form 1040) or consult a tax professional if unsure. For the most accurate picture, also include your state marginal rate if the bond is issued in your state.
Not always — it depends entirely on your tax bracket. For investors in high brackets (32%+), munis often win on an after-tax basis. For investors in low brackets (12% or below), corporate bonds typically offer better after-tax yields because munis trade at lower gross yields. Always calculate the TEY for your specific situation before deciding.
TEY converts a tax-exempt yield into an equivalent taxable yield — it tells you what a taxable bond would need to yield to match the muni. After-tax yield converts a taxable yield into what you actually keep after paying taxes — it goes the other direction. Both answer the same question from opposite angles: which bond puts more money in your pocket after tax.