Tax-Equivalent Yield Calculator
Enter a tax-free yield and your tax rates to see what a taxable bond or CD must pay to match it.
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The municipal bond or fund yield (yield to worst or SEC yield).
- Combined tax rate
- 29%
- Yield you keep
- 3.5%
- Extra income per $10,000 a year
- $102 a year
How this was calculated
- Combined marginal rate = 24% federal + 5% state = 29%.
- The bond is tax-free, so you keep all 3.5%.
- A fully taxable bond keeps 1 − 0.29 = 0.71 of its yield, so it must pay 3.5% ÷ 0.71 = 4.9296%.
| Federal bracket | Tax-equivalent yield |
|---|---|
| 10% | 4.118% |
| 12% | 4.217% |
| 22% | 4.795% |
| 24% | 4.93% |
| 32% | 5.556% |
| 35% | 5.833% |
| 37% | 6.034% |
Find your federal bracket (2026)
- Federal marginal rate
- 24%
Uses the 2026 brackets after the standard deduction and ignores the 3.8% net investment income tax. Educational, not investment advice.
The tax-equivalent yield formula
A tax-equivalent yield answers one question: what would a taxable bond have to pay to leave you with as much as a tax-free one? Divide the tax-free yield by one minus your tax rate: TEY = tax-free yield ÷ (1 − tax rate). This tax-equivalent yield calculator uses your marginal rate, the rate on your next dollar of income, because that is the rate the bond's interest would be taxed at.
Worked examples
A municipal bond yields 3.5% and you are in the 24% federal bracket: 3.5 ÷ 0.76 = 4.61%. Any taxable bond paying less than 4.61% leaves you with less. If the bond is also exempt from your 5% state tax (an in-state muni), the combined rate is 29% and the tax-equivalent yield is 3.5 ÷ 0.71 = 4.93%. Buy a muni from another state and your own state usually taxes the interest, so you keep 3.5 × 0.95 = 3.325% and the equivalent is 3.325 ÷ 0.71 = 4.68%. Treasuries work the other way round: federal tax applies but states cannot tax the interest, so a 4% Treasury equals 4 × 0.76 ÷ 0.71 = 4.28% from a fully taxable corporate bond or CD.
Who benefits from tax-free bonds
The higher your bracket, the more a tax-free yield is worth. In the 12% bracket that same 3.5% muni equals only 3.98%, often less than a CD or Treasury pays, while in the 37% bracket it equals 5.56%. That is why municipal bonds usually make sense in a taxable brokerage account for higher earners and almost never inside an IRA or 401(k), where the interest is sheltered anyway.
When the result is misleading
Compare like with like: the same maturity, credit quality and call features. Some municipal interest (private-activity bonds) is subject to the alternative minimum tax, and muni interest still counts toward the income that makes Social Security benefits taxable. High earners also pay the 3.8% net investment income tax on taxable interest, which raises their effective rate; add it to the federal rate if it applies. The formula treats state tax as not deductible on the federal return, which is true when you take the standard deduction.
Sources
SEC Investor.gov (municipal bonds and tax-equivalent yield), IRS Publication 550 (tax-exempt interest and the state exemption for US Treasury interest), IRS Rev. Proc. 2025-32 (2026 federal brackets).
Frequently asked questions
What is the tax-equivalent yield formula?
Tax-equivalent yield = tax-free yield ÷ (1 − marginal tax rate). A 3.5% municipal bond in the 24% bracket equals 3.5 ÷ 0.76 = 4.61% from a taxable bond.
Should I include state tax?
Yes, if the bond is exempt from your state's tax, which is usually the case for munis issued in your own state. Add the state rate to the federal rate: at 24% + 5% a 3.5% muni equals 4.93%.
Are municipal bonds from another state tax-free?
Usually only from federal tax. Most states tax interest on other states' bonds, so use the federal-only option, which lowers the after-tax yield by your state rate.
How do Treasuries compare?
Treasury interest is federally taxed but exempt from state and local income tax, so it is worth more than the same yield on a CD or corporate bond if you pay state tax.
Which tax rate should I use?
Your marginal rate, the bracket of your last dollar of income, not your average rate. High earners can add the 3.8% net investment income tax.