Tax Equivalent Yield Calculator

Compare a tax-exempt yield with taxable alternatives by combining federal, state, and local marginal rates.

Finance planning estimate

Topic review: Michael Brennan

Small Business Finance Writer. Assigned as the finance topic reviewer for tax, debt, repayment, payroll, and business-finance calculators.

Reviewed 24 March 2026 Updated 7 March 2026 View reviewer profile Contact editorial team

Compare tax-exempt and taxable yields Tax-equivalent yield shows the taxable rate needed to match a tax-free income stream after federal, state, and local taxes.

Tax-exempt yield (%) Federal tax rate (%)

State tax rate (%) Local tax rate (%)

Assumptions

Tax-equivalent yield adds the entered tax rates together as a simple combined marginal rate. It does not model deductions, phase-outs, or state-specific muni treatment.

Result

6% TEY

A tax-exempt yield of 4.2% compares to a taxable equivalent of 6% at the combined marginal rate.

Combined marginal tax rate: 30%
Taxable yield premium: 1.8%
Federal rate: 22%
State + local: 8%

Meaningful tax advantage The current tax-exempt yield is equivalent to a taxable rate of 6% once the entered marginal tax rate is applied.

Tax-rate comparison

Scenario	Marginal tax rate	Taxable equivalent yield
No tax	0%	4.2%
Current combined rate	30%	6%
12% bracket	12%	4.77%
22% bracket	22%	5.38%
32% bracket	32%	6.18%
37% bracket	37%	6.67%

How to use this result

Compare the tax-equivalent yield against taxable bonds, CDs, or money-market funds at the same tax rate. The higher the marginal tax rate, the more attractive the tax-exempt yield becomes.

About this calculator

Finance planning estimate Reviewed 24 March 2026 Updated 7 March 2026

Topic review

Michael Brennan

Small Business Finance Writer. Assigned as the finance topic reviewer for tax, debt, repayment, payroll, and business-finance calculators.

Formula provenance

The methodology summary explains the formula family in use, and the source list points to the primary or authoritative references checked for this topic.

Methodology

Divides the entered tax-exempt yield by one minus the combined marginal tax rate, where the combined rate is the sum of the entered federal, state, and local percentages. The calculator also shows comparable taxable-equivalent yields across common bracket scenarios.

Limitations

Uses a simplified additive marginal-rate model and does not adjust for state-specific municipal exemptions, deductibility interactions, AMT, NIIT, or other tax-law edge cases.
Assumes the tax-exempt yield entered is the correct yield measure to compare, but tax-equivalent analysis can be distorted if one side uses coupon rate and the other uses yield to maturity or yield to call.
Does not evaluate bond credit risk, duration, call structure, liquidity, or issuer-specific tax treatment.
This is a comparison estimate, not individualized tax advice or a portfolio recommendation.

Disclaimer

Use the output as a first-pass after-tax yield comparison only. Before relying on it for buying or selling decisions, confirm the right yield measure, the right marginal tax rate, and the bond-specific tax treatment that applies to you.

Primary finance sources

IRS - About Tax-Exempt Bonds — Primary IRS overview of federally tax-exempt bond interest and key exceptions.
IRS Publication 550 - Investment Income and Expenses — Primary IRS investor-tax reference covering tax-exempt interest and related bond-income rules.
MSRB - Tax Treatment — Official municipal-securities source describing how tax treatment can differ across jurisdictions and bond structures.

Change notes

Finance change note: the formula, tax or rate assumptions, source set, disclaimer, and planning guidance for this calculator were last reviewed on 2026-03-24. Report a correction at contact@calcipedia.org; substantive rule or assumption changes refresh both the reviewed date and the updated date shown on the page.

See our calculation methodology and editorial standards, plus the editorial contact route, for how this estimate is produced and corrected.

← All Saving & Investing calculators

Municipal Bond Comparison

Tax equivalent yield calculator guide: marginal tax rate, municipal income

A tax equivalent yield calculator estimates the taxable yield needed to match a tax-exempt income stream after federal, state, and local taxes. It is a useful comparison tool for municipal bonds and other tax-favored income, but the answer is only as reliable as the marginal tax-rate assumption behind it.

What tax equivalent yield is measuring

Tax equivalent yield converts a tax-exempt yield into the pre-tax yield a taxable investment would need to offer to leave the same after-tax income. That makes it useful when you are comparing municipal-bond income with taxable bonds, CDs, or money-market alternatives.

The concept is simple, but it still depends on the investor's actual marginal tax exposure. If the tax rate is entered too low or too high, the comparison can become misleading even when the formula itself is correct.

The formula and the combined-rate assumption

The standard formula divides the tax-exempt yield by one minus the marginal tax rate. This calculator uses a simplified combined marginal rate by adding the entered federal, state, and local percentages together, then shows how the same tax-exempt yield compares across several bracket examples.

That simplification is intentional and transparent. It does not model state-specific municipal-bond exemptions, deductibility interactions, the alternative minimum tax, or other tax-law nuances that may matter in real planning.

Tax-equivalent yield = Tax-exempt yield / (1 - Combined marginal tax rate)

The core relationship used to convert tax-free income into a taxable-yield equivalent.

Combined marginal tax rate = Federal rate + State rate + Local rate

The simplified additive rate assumption used by this version of the calculator.

Worked example: 4.20% tax-exempt yield at a 30% combined rate

Suppose a tax-exempt bond offers 4.20% and the investor's combined marginal rate is 30%. The tax-equivalent yield is 6.00%, meaning a taxable bond would need to yield about 6.00% before tax to match the same after-tax income stream.

That does not automatically make the municipal bond the better choice. Credit quality, duration, call features, state tax treatment, and liquidity still matter. The result simply puts the tax advantage into a common yield language.

Why the tax-rate input needs care

Marginal and effective tax rates are not the same. Tax-equivalent yield is usually framed around the marginal rate because it is comparing the tax treatment of the next dollar of investment income, not the average rate paid across all income.

It is also important to compare like with like. A tax-exempt bond's yield to maturity or yield to worst should not be compared with a taxable bond's coupon rate. Use comparable yield measures on both sides of the decision.

Further reading

IRS - About Tax-Exempt Bonds — Primary IRS overview explaining when bond interest can be federally tax-exempt and where exceptions can still apply.
IRS Publication 550 - Investment Income and Expenses — Primary IRS investor-tax reference covering tax-exempt interest and related tax treatment details.
MSRB - Tax Treatment — Official municipal-securities reference describing how federal, state, and local treatment can differ for muni interest.

Frequently asked questions

Why should I use a marginal tax rate instead of an effective tax rate?

Because tax-equivalent yield is comparing the tax treatment of the next dollar of investment income. The marginal rate is usually the more relevant assumption for that comparison than an average effective rate across all income.

Does tax-exempt always mean completely tax-free?

No. Interest can be federally tax-exempt while still creating state, local, AMT, or other tax consequences depending on the bond and the investor's situation.

Should I compare tax-equivalent yield with a taxable bond's coupon rate?

Usually no. It is better to compare like with like, such as yield to maturity, yield to call, or yield to worst on both investments rather than mixing a tax-equivalent yield with a coupon rate.

Does a higher tax-equivalent yield prove the muni is the better investment?

No. It only shows the taxable yield needed to match after-tax income. Credit risk, call risk, duration, state tax treatment, and liquidity can still change the better overall choice.

Also in Saving & Investing