What is tax-equivalent yield?

Tax-equivalent yield is the pretax yield a taxable investment must generate to equal the after-tax yield of a tax-exempt investment. Formula: TEY = Tax-Exempt Yield ÷ (1 - Tax Rate).

When should I choose municipal bonds over taxable bonds?

Choose municipal bonds when their tax-equivalent yield exceeds the yield of comparable taxable bonds. This typically benefits investors in higher tax brackets (22% or above).

Are municipal bonds always tax-free?

Municipal bonds are generally exempt from federal taxes and often state taxes if you live in the issuing state. However, they may be subject to Alternative Minimum Tax (AMT) and capital gains taxes if sold at a profit.

Tax-Equivalent Yield Calculator

Compare municipal bonds and taxable investments on an after-tax basis. Calculate tax-equivalent yields to determine which investment provides better returns considering your federal and state tax rates.

Calculation Type:

Tax-Exempt Yield (%) Municipal bond or tax-exempt investment yield

Taxable Yield (%) Corporate bond or taxable investment yield

Federal Tax Rate (%):

State Tax Rate (%) Enter 0 for states with no income tax

Investment Amount ($) Optional: for income comparison calculations

Subject to AMT:

AMT Rate (%) Alternative Minimum Tax rate (typically 26% or 28%)

Tax-Equivalent Yield: -

Taxable Equivalent Yield: -

Effective Tax Rate: -

After-Tax Yield Difference: -

Understanding Tax-Equivalent Yield

Tax-equivalent yield (TEY) is a critical concept for comparing investments with different tax treatments. It answers the question: "What yield would a taxable investment need to provide to equal the after-tax return of a tax-exempt investment?"

Tax-Equivalent Yield Formulas

🧮 Basic TEY Formula

Tax-Equivalent Yield:

TEY = Tax-Exempt Yield ÷ (1 - Tax Rate)

Taxable Equivalent:

Taxable Equiv = Taxable Yield × (1 - Tax Rate)

Basic comparison for single tax jurisdiction

🏛️ Combined Tax Rate

Effective Tax Rate:

Effective Rate = Federal + State - (Federal × State)

With AMT:

AMT Adjusted = Max(Regular Rate, AMT Rate)

Accounts for federal, state, and AMT considerations

Types of Tax-Advantaged Bonds

🏛️ Municipal Bonds

Federal Tax-Exempt State Varies

General obligation bonds
Revenue bonds
Build America Bonds
Private activity bonds (may have AMT)

🏦 Taxable Bonds

Fully Taxable

Corporate bonds
Treasury bonds
High-yield bonds
International bonds

🇺🇸 Treasury Securities

Federal Taxable State Tax-Exempt

Treasury bills
Treasury notes
Treasury bonds
TIPS (inflation-protected)

Tax-Equivalent Yield Examples

📊 High Tax Bracket Example

Investor in 32% federal, 8% state tax bracket:

Municipal Bond Yield 3.5%

Federal Tax Rate 32%

State Tax Rate 8%

Effective Tax Rate 37.44%

Tax-Equivalent Yield 5.59%

💰 Investment Comparison

$100,000 investment comparison:

Municipal Bond (3.5%) $3,500 (tax-free)

Corporate Bond (5.0%) $5,000 (taxable)

After-Tax Corporate $3,128

Muni Advantage $372 annually

🏛️ State-Specific Example

California resident, 24% federal bracket:

CA Municipal Bond 3.2% (double tax-free)

Federal Rate 24%

CA State Rate 9.3%

Combined Rate 31.77%

Tax-Equivalent Yield 4.69%

Important Tax Considerations

⚠️ Alternative Minimum Tax (AMT)

Some municipal bonds subject to AMT
Private activity bonds often AMT taxable
AMT rate: 26% or 28% depending on income
Check AMT status before investing

🏛️ State Tax Variations

In-state munis often state tax-exempt
Out-of-state munis may be state taxable
Some states have no income tax
Local taxes may also apply

💹 Capital Gains Considerations

Municipal bond gains are taxable
Original issue discount (OID) rules
Market discount taxation
Premium bond amortization

🎯 Investment Strategy

Higher tax brackets benefit more
Consider credit quality differences
Liquidity and duration matching
Diversification across issuers

Tax Bracket Breakeven Analysis

Tax Bracket	3% Muni TEY	4% Muni TEY	5% Muni TEY	Recommendation
12%	3.41%	4.55%	5.68%	Consider taxable bonds
22%	3.85%	5.13%	6.41%	Evaluate both options
24%	3.95%	5.26%	6.58%	Munis become attractive
32%	4.41%	5.88%	7.35%	Strong muni advantage
37%	4.76%	6.35%	7.94%	Maximum muni benefit

State Tax Impact on Municipal Bonds

🚫 No State Income Tax

Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming

Only federal taxes apply to taxable investments

📉 Low Tax States

North Dakota (2.9%), Pennsylvania (3.07%), Indiana (3.23%)

Modest additional benefit from munis

📈 High Tax States

California (13.3%), New York (10.9%), New Jersey (10.75%)

Significant advantage for in-state munis

How to Use This Calculator

Choose Calculation

Select TEY, taxable equivalent, or comparison

Enter Yields

Input the yield(s) you want to compare

Set Tax Rates

Select federal bracket and enter state rate

Add Investment Amount

Optional: for income comparison calculations

Consider AMT

Check if bonds are subject to AMT

Compare Results

Analyze equivalent yields and income differences

💡 Municipal Bond Investment Tips

🎯

Municipal bonds are most beneficial for investors in the 24% tax bracket or higher

🏛️

In-state municipal bonds often provide additional state tax benefits

⚠️

Check if municipal bonds are subject to Alternative Minimum Tax (AMT)

📊

Consider credit quality and call risk when comparing municipal and corporate bonds

💰

Use tax-advantaged accounts for taxable bonds to maximize after-tax returns