Tax-Equivalent Yield Calculator

How it works

Interest on most municipal bonds is free of federal income tax, and often of state tax if you live in the issuing state. Interest on corporate bonds and CDs is taxed. To compare them fairly, convert one into the other's terms at your marginal tax rate, the rate on your next dollar of income.

The tax-equivalent yield is the taxable yield that would leave you with the same income after tax as the tax-free yield. The after-tax yield is the reverse: what a taxable yield leaves you once tax is paid. If the tax-equivalent yield is higher than the taxable yields on offer, the tax-free bond pays more after tax.

A state rate is combined with the federal rate as federal + state × (1 − federal). That formula applies only when you itemize deductions and your state and local taxes are below the federal SALT deduction cap, so each extra dollar of state tax also lowers your federal tax. If you take the standard deduction, or your state and local taxes already exceed the cap, the combined rate is simply federal + state: enter that sum as an Other federal rate and set the state rate to 0.

Formula

combined rate t = federal + state × (1 − federal)
tax-equivalent yield = tax-free yield ÷ (1 − t)
after-tax yield = taxable yield × (1 − t)

Example

A municipal bond yielding 3% to someone in the 24% federal bracket with no state tax is worth the same as a taxable bond yielding 3% ÷ 0.76 = 3.9474%. Add a 5% state tax and the combined rate is 24% + 5% × 76% = 27.8%, so the tax-equivalent yield rises to 4.1551%.

Wikipedia's municipal bond article works the same formula for a 1.0% tax-free yield at a 38% rate: 1.0% ÷ 0.62 = 1.6129%. Going the other way, a 4.5% CD in the 24% bracket with no state tax yields 3.42% after tax.

Assumptions and limitations

• Tax rates offered are the 2026 federal marginal income tax rates from IRS Revenue Procedure 2025-32 (10%, 12%, 22%, 24%, 32%, 35%, 37%). Your marginal rate depends on your filing status and taxable income; choose Other to enter a different year or rate.
• The state rate is a single flat rate. The tax-free yield is assumed exempt from both federal and that state tax; an out-of-state municipal bond is usually taxed by your state, so set the state rate to 0 and compare the result directly with the taxable yield, since both are taxed by your state.
• The combined rate federal + state × (1 − federal) assumes you itemize and your state and local taxes are below the federal SALT deduction cap. If you take the standard deduction or are already at the cap, your combined rate is federal + state; enter that as an Other federal rate with the state rate at 0.
• The 3.8% net investment income tax, the alternative minimum tax (some private-activity municipal bonds are subject to it), and the taxation of market discount and capital gains are not modelled. Treasury interest is exempt from state tax, which this calculator does not apply automatically.
• Results are estimates for planning and are for informational and educational purposes only. They are not financial, tax or legal advice.

Frequently asked questions