Tax-Equivalent Yield Calculator
The two yields, and your tax rates
Your result will appear here
Fill in the fields and this updates as you type.
Know what this estimate is based on
- Jurisdiction
- No statute sets these results — they are return, fee and time-value arithmetic that holds in any market. Tools in this category that do turn on U.S. tax law or a contribution limit say so on their own page.
- Scope and limitations
- Scenario model, not a forecast. Returns, volatility, inflation, fees and taxes are assumptions you supply, and actual investment outcomes can be lower or negative. Past performance does not carry forward, and no allocation shown here is a recommendation.
- Source links checked
- Sep 19, 2026
Built and regression-tested by Smart Tools Lab. It has not been individually reviewed by a licensed financial, tax, or legal professional.
How to use
- 01
Enter the municipal bond's yield and the taxable bond's yield you are comparing it against.
- 02
Enter your federal marginal rate and your combined state and local rate.
- 03
If the muni is issued outside your own state, enter your state rate in the muni-state field too — an out-of-state muni is state-taxable.
- 04
Set the net investment income tax. The field opens at 0, which is right for most filers: it is 3.8% only where modified AGI is over $200,000 single or $250,000 married filing jointly, and entering it when it does not apply to you flips the verdict toward the muni.
- 05
Read the taxable yield the muni is equivalent to, and which bond wins by how many basis points.
Formula
Tax-equivalent yield = muni yield × (1 − state tax on the muni) ÷ (1 − federal rate − state rate − net investment income tax). The muni wins when that exceeds the taxable yield on offer.
Example
A 3.5% in-state muni against a 5% taxable bond, in a 24% federal bracket with 5% state tax. Leave the surtax field at the 0 it opens on and the combined rate is 29.0%, so the muni is equivalent to 3.5 ÷ 0.710 = 4.93% — 7 basis points WORSE than the 5% taxable bond, which wins by $50 a year on every $100,000, and the two tie at a 25.0% federal rate. Now put 3.8 in the surtax field, which is right only above $200,000 single or $250,000 joint: the combined rate becomes 32.8%, the muni is worth 3.5 ÷ 0.672 = 5.21% — 21 basis points better — and it wins by $140 a year per $100,000, with the tie moving down to a 21.2% federal rate. One field, and the verdict reverses: that is why it opens at zero rather than at 3.8.
Definitions
- Basis point
- A hundredth of a percentage point. Bond decisions are routinely made on 10 to 30 of them.
- Net investment income tax
- A 3.8% surtax on taxable investment income above $200,000 single or $250,000 joint. Municipal interest is exempt.
- In-state muni
- A bond issued in your own state, usually free of that state's income tax as well as federal.
Good to know
Comparing across the tax line
A municipal bond paying 3.5% and a corporate bond paying 5% cannot be compared as they stand, because one of them is taxed and the other is not. Interest on most municipal bonds is exempt from federal income tax, and from state tax as well if you live in the issuing state. Tax-equivalent yield fixes the comparison by asking what a taxable bond would have to pay for you to keep the same money: divide the tax-free yield by one minus your combined marginal rate. The result depends entirely on your bracket, which is why munis are a good idea for some investors and a poor one for others holding exactly the same bond.
Every rate that belongs in the denominator
Most calculators use the federal rate alone and stop, which understates the muni in any state with an income tax. Three rates belong there. Your federal marginal rate is the largest. Your state and local rate is next, and it applies to the taxable bond's interest — though not to Treasuries, which are federally taxable but state-exempt, the mirror image of a muni. Third is the 3.8% net investment income tax on taxable investment income above $200,000 single or $250,000 joint, from which municipal interest is expressly excluded. At a 24% federal rate with 5% state tax and the surtax, the combined rate is 32.8%, and a 3.5% muni is equivalent to 5.21% taxable.
In state, out of state, and why there is no switch
The one adjustment that goes in the numerator is state tax on the muni itself. A bond issued in your own state is normally exempt from your state's income tax; one issued elsewhere is not, so an out-of-state muni is state-taxable and its yield has to be reduced accordingly. It is tempting to model this as a toggle that simply cancels the state rate, but that is arithmetically wrong and understates the answer by roughly 11 basis points on a 3% muni at a 32% federal and 5% state rate. Entering the muni's own state rate as a number handles both cases exactly, which is why this page asks for it that way.
The break-even bracket, and what the arithmetic omits
The most useful output is the federal rate at which the two bonds tie — 21.2% in the worked example. Below it the taxable bond wins and munis have no place in the account; above it the muni does. Because tax-exempt interest is worth nothing inside an IRA or 401(k), munis belong in taxable accounts and taxable bonds in sheltered ones, which is the general shape of asset location. Three things sit outside the arithmetic: credit quality and liquidity differ between any two specific bonds; municipal interest, though untaxed, still counts toward the calculation that decides how much of your Social Security is taxable; and private-activity municipal bonds can be caught by the alternative minimum tax.
Frequently asked questions
What does tax-equivalent yield actually mean?
It is the yield a taxable bond would have to pay to leave you with the same money as the tax-free one. It puts two bonds that are taxed differently onto one scale, which is the only way to compare them honestly.
Why is there no in-state / out-of-state switch?
Because it is a number, not a choice. A municipal bond issued in your own state is usually exempt from your state tax as well as federal; one issued elsewhere is not. Entering your state rate in the muni field prices exactly that, and it is more precise than a toggle — the state rate does not simply cancel out of the comparison.
Does the net investment income tax apply to municipal interest?
No — that is the point. The 3.8% applies to taxable investment income above $200,000 single or $250,000 married filing jointly, and municipal interest is excluded. It therefore widens the muni's advantage, which is why it belongs in the denominator here.
What is the break-even federal rate?
The bracket at which the two bonds tie. Below it the taxable bond wins; above it the muni does. It is the fastest way to see whether munis belong in your account at all — in a low bracket they generally do not.
What does this not capture?
Credit quality, call features and liquidity, all of which differ between the two bonds and none of which are arithmetic. Municipal interest can also raise the taxable share of Social Security benefits, and private-activity bonds can be caught by the alternative minimum tax.
How big a gap between the two bonds is worth acting on?
The page reads a gap under about 50 basis points, in tax-equivalent terms, as a close call: a margin that thin can flip if either yield moves a tenth of a point, and municipal bonds usually cost more to trade than Treasuries, so switching can cost more than the edge. At the other end, a gap of 150 basis points or more is worth checking rather than acting on — two bonds that far apart after tax are usually not comparable, because the maturity, the credit quality or a call feature differs.