Introduction
Some bonds pay you interest that is tax-free. Others pay interest that you must pay tax on. This makes it hard to tell which one is the better deal. A 5% tax-free bond can beat a 6% taxable bond once taxes take their cut.
This Tax Equivalent Yield Calculator runs the comparison both ways. Panel A turns a tax-free yield into the taxable yield you would need to match it. Panel B works the other way and shows what a taxable bond is really worth after tax.
Just type in the yield, your federal tax rate, and your state tax rate. You can also say if the bond was issued in your state and if you deduct state tax on your federal return. The tool shows your answer, the steps, a chart, and a table you can build yourself.
Use it to compare municipal bonds, corporate bonds, Treasuries, CDs, and savings accounts on fair ground.
How to use our Tax Equivalent Yield Calculator
Enter your bond yield and your tax rates, and the calculator shows the tax-equivalent yield, your effective tax rate, a step-by-step solution, a chart, and a comparison table.
Panel A — Tax-Free to Taxable
Tax-Free Yield (%): Type the yield of your tax-free bond, like a muni bond. Use the box or the slider.
Federal Marginal Tax Rate (%): Type your top federal tax bracket, such as 22 or 35.
State Marginal Tax Rate (%): Type your top state income tax rate. It only counts if the bond is tax-free in your state.
Bond issued in my state: Check this box if you live in the state that issued the bond. This adds the state tax break.
State taxes are deductible: Check this box if you itemize and write off state income tax on your federal return. Leave it clear if you take the standard deduction.
Panel B — Taxable to Tax-Free
Taxable Yield (%): Type the yield of the taxable bond or investment you want to compare.
Federal Marginal Tax Rate (%): Type your top federal rate for this scenario. It works on its own, apart from Panel A.
State Marginal Tax Rate (%): Type your top state rate. It is used only when the in-state box is checked.
Tax-free bond issued in my state: Check this box to add the state tax break to the math.
State taxes are deductible: Check this box if you deduct state tax on your federal return.
Comparison Table
Table Variable: Pick "Vary Tax Rate" to hold the yield still, or "Vary Yield" to hold the tax rate still.
Calculation Direction: Pick tax-free to taxable, or taxable to tax-free.
Fixed value: Type the number you want to keep the same in every row.
State Marginal Tax Rate (%): Type the state rate used in the table rows.
Range Start (%) and Range End (%): Type the low and high ends of the range you want to see.
Step (%): Type how much each row goes up. It must be more than 0 and give 50 rows or fewer.
In-state bond and deductible boxes: Check these to apply the state tax break and the federal deduction in the table.
Buttons: Click "Calculate" to update the results, "Generate Table" to build the table, and "Reset" to go back to the start values.
What Is Tax-Equivalent Yield?
Tax-equivalent yield (TEY) shows how much a taxable bond must pay to match a tax-free bond after taxes. Municipal bonds ("munis") often pay less interest than corporate or Treasury bonds. But you usually keep all of the muni interest, because it is free from federal income tax. A taxable bond looks bigger on paper, yet the IRS takes a cut. TEY puts both bonds on the same level so you can compare them fairly.
The Formula
Tax-Equivalent Yield = Tax-Free Yield ÷ (1 − Your Tax Rate)
Example: a muni pays 5% and you are in the 22% federal bracket. 5% ÷ (1 − 0.22) = 6.41%. A taxable bond would need to pay more than 6.41% to beat that muni.
You can also flip it. To turn a taxable yield into its tax-free match, multiply by (1 − your tax rate). A 7% taxable bond at a 22% rate is worth 5.46% tax-free.
Why Your Tax Rate Matters
Use your marginal tax rate, the rate on your last dollar of income, not your average rate. The higher your bracket, the more a tax-free bond is worth. Someone in the 12% bracket gains little from munis. Someone in the 37% bracket gains a lot.
State Taxes and In-State Bonds
Where the bond was issued changes the math:
- In-state bond: Usually free from both federal and state income tax. You add the state rate to the federal rate.
- Out-of-state bond: Normally free from federal tax only. Your state still taxes the interest, so only the federal rate is used.
- No state income tax: Enter 0 for the state rate.
If you itemize and deduct state income tax on your federal return, the state tax costs you a little less. The combined rate becomes: federal + state × (1 − federal). If you take the standard deduction or hit the $10,000 SALT cap, the rates simply add together.
Things to Keep in Mind
TEY only compares yields. It does not judge credit risk, how long the bond lasts, or how easy it is to sell. Some munis can trigger the Alternative Minimum Tax (AMT). Capital gains on any bond are still taxable, even a muni. And munis held inside an IRA or 401(k) waste their tax break, since those accounts are already sheltered. Tax rules change, so check with a tax professional before you buy.