Tax-Equivalent Yield Calculator

What this calculator does

Enter the municipal yield, the taxable yield you are comparing against, your federal and state marginal rates, whether the bond is issued in your own state, and any surtax on investment income. It returns the combined rate you are actually exposed to, the tax-equivalent yield, both instruments on an after-tax basis, which one wins, by how much, and the marginal rate at which they are exactly equal.

The break-even rate is the most useful output on the page, and the least commonly shown.

Why headline yields mislead

A municipal bond yielding 3.4 percent looks worse than a corporate bond yielding 4.6 percent. On the numbers as printed, it is.

But you keep all of the 3.4 and only part of the 4.6. At a combined marginal rate of 29 percent, that corporate bond leaves you 4.6 × 0.71 = 3.27 percent. The muni wins, despite trailing by 1.2 points on the screen.

Two equivalent ways to express the same comparison:

Tax-equivalent yield grosses the muni up: 3.4 ÷ (1 − 0.29) = 4.79 percent. That is what a taxable bond must yield to match it.

After-tax yield brings the taxable bond down: 4.6 × (1 − 0.29) = 3.27 percent.

Both give the same ranking. The first is the industry convention because it produces a number directly comparable to the taxable yields quoted everywhere else.

Your combined rate is more than your federal bracket

The rate that matters is everything the taxable alternative is exposed to:

• Federal marginal rate — your top bracket, not your effective rate. Interest is stacked on top of your other income, so it is taxed at the margin.
• State marginal rate — where your state taxes interest income.
• Any surtax on investment income that applies at your income level.

Which produces a combined figure that can be well above the federal bracket alone. That is the number that goes into the formula, and it is why residents of high-tax states find munis attractive at income levels where residents of no-income-tax states do not.

State deductibility. If you itemise and are not already at the deduction cap, state tax paid reduces federal taxable income, so its effective bite is state × (1 − federal) rather than the full state rate. The calculator handles this as an option because it applies to a minority of filers.

The in-state question

This one changes the answer materially and is frequently overlooked.

Municipal interest is generally exempt from federal tax. State treatment is different: most states exempt their own issues and tax everybody else’s. So a California resident buying a California bond typically escapes both; the same resident buying an Ohio bond escapes only the federal.

Set the in-state toggle honestly. An out-of-state muni still pays state tax, and the calculator reduces its after-tax yield accordingly.

This is the entire reason single-state municipal funds exist. They are less diversified by construction — a concentrated bet on one state’s fiscal health — and in a high-tax state the after-tax difference is often large enough to justify it.

Break-even: the number to actually remember

Rather than asking “am I in a high enough bracket for munis,” ask the calculator for the break-even rate:

break-even = 1 − (muni yield ÷ taxable yield)

With 3.4 and 4.6: 1 − (3.4 ÷ 4.6) = 26.1 percent.

So at any combined marginal rate above 26.1 percent, the muni wins. Below it, the taxable bond does. That single number encapsulates the entire comparison and does not change until the yields do.

It is also why the common advice “munis are for high earners” is a shorthand for something more precise. The tax benefit scales linearly with your marginal rate, so it is worth nothing at a zero rate and a great deal at a high one. The break-even tells you where you sit.

Where this comparison stops being useful

Tax-equivalent yield answers exactly one question: how the two instruments are taxed. It is silent on everything else that determines whether a bond is a good idea.

Credit quality. A muni yielding well above comparable issues is being paid to take a risk. General obligation bonds backed by taxing power and revenue bonds backed by a specific project’s income are different instruments with different failure modes.

Duration and rate risk. A 20-year bond and a 3-year bond are not comparable regardless of yield. Long duration is a bet on rates, and it is often the dominant driver of return.

Call provisions. Many munis are callable, which caps your upside if rates fall while leaving your downside intact if they rise.

Liquidity. The municipal market is thinner than the corporate market, and bid-ask spreads on individual issues can be wide enough to matter.

Alternative minimum tax. Certain private activity bonds are exempt from regular tax but not from AMT.

Where you hold it. Municipal bonds in a tax-deferred account are close to pointless — you are paying a yield premium for an exemption the account already provides.

What this leaves out

• Credit, duration, call and liquidity risk, as above.
• Bracket lookups. You supply the rates, so this is correct in any year.
• Income-tested thresholds. Muni interest, while exempt, is counted in some income calculations that affect other things.
• Fund expense ratios, which come off the yield before any of this applies.
• State-specific exemption rules, which vary and have exceptions.

This is arithmetic on rates you enter, not investment advice. For fixed-income comparisons without the tax layer, the CD calculator and compound interest calculator cover the mechanics of yield and compounding directly.