Tax-Equivalent Yield Calculator

How to use this calculator

Enter the municipal bond yield, your assumed federal marginal rate, the state/local rate that applies to the taxable alternative, any state/local rate that applies to the muni, and the taxable alternative yield. Use 0% where a tax does not apply. The results compare after-tax yields and show the taxable yield needed to match the muni under those assumptions.

When this calculator is useful

• Comparing an in-state municipal bond with a CD or corporate bond
• Setting the state-tax input to zero when comparing a muni with Treasury interest
• Checking whether a higher headline yield still wins after assumed income taxes
• Testing an out-of-state municipal bond that may owe state income tax

Important limitations

This is a yield comparison, not a tax return or a bond recommendation. It does not determine whether a bond is federally tax-exempt, state-exempt, subject to the alternative minimum tax, or affected by deductions and surtaxes. Credit risk, call risk, maturity, liquidity, market price, fund expenses, and capital gains can outweigh a small yield difference.

For best results, run at least three cases: a conservative case, a middle case, and a stretch case. If a small change in inputs creates a big change in the answer, that is a sign the decision may be sensitive to rates, fees, timing, or market performance.

Tax-equivalent yield formula

A municipal bond and a taxable bond cannot be compared from their quoted yields alone when their interest receives different tax treatment. This calculator first estimates the yield left after the taxes entered for each investment.

Municipal after-tax yield = municipal yield × (1 − state/local rate that applies to the muni)

Taxable after-tax yield = taxable yield × [1 − (federal rate + state/local rate on taxable interest)]

Tax-equivalent yield = municipal after-tax yield ÷ [1 − (federal rate + state/local rate on taxable interest)]

The formula deliberately keeps the tax inputs visible. It does not attempt to decide whether state taxes are deductible on a federal return or whether another tax rule applies. Use rates that fit the comparison you want to test, then confirm the treatment from the bond documents and current tax guidance.

Worked example: a 3.5% muni versus a 4.5% taxable bond

Start with the default case: a 3.5% municipal yield, a 22% federal marginal rate, a 5% state/local rate on taxable interest, no state tax on the muni, and a 4.5% taxable alternative.

On $10,000, that yield gap is about $21.50 for one year before price changes, fees, or compounding. A difference that small can be erased by a fund expense ratio, a bid-ask spread, a call, or a change in market value. The calculation helps with the tax comparison; it does not settle the investment decision.

How to compare a municipal bond with a Treasury

Treasury interest needs a different state-tax input from a CD or corporate bond. IRS Topic 403 states that interest on Treasury bills, notes, and bonds is subject to federal income tax but exempt from state and local income taxes. Set the taxable state/local field to 0% for that comparison.

With the other default inputs unchanged, removing the 5% state tax lowers the 3.5% muni’s tax-equivalent yield from 4.79% to about 4.49%. A 4.5% Treasury would leave about 3.51% after the assumed 22% federal tax, nearly even with a 3.5% in-state muni. Compare maturity and risk next rather than treating the last decimal as decisive.

The CD and Treasury yield calculator can estimate interest over a term. Our Treasury bills versus CDs guide covers liquidity, deposit insurance, auctions, and reinvestment risk.

In-state and out-of-state municipal bonds

Federal tax exemption does not automatically settle state tax. An investor may receive favorable state treatment on bonds issued in the investor’s home state while owing state income tax on another state’s bonds. Rules vary by jurisdiction and security. That is why this page has a separate field for the state/local rate on municipal interest.

For an out-of-state example, change the muni state/local rate from 0% to 5%. The 3.5% quoted muni yield becomes 3.325% after that assumed tax. Its federal-and-state tax-equivalent yield against a fully taxable investment becomes about 4.55%, not 4.79%.

AMT and other tax details the calculator cannot decide

IRS Publication 550 says interest on certain qualified private activity bonds may be a tax preference item for the alternative minimum tax. A fund can also hold a mix of bonds with different tax characteristics. The calculator does not inspect a CUSIP, fund report, Form 1099-INT, or Form 6251, so it cannot tell whether AMT treatment applies.

Tax-exempt interest can still be reportable. Selling a municipal bond or bond fund can also create a capital gain or loss even when its interest is exempt. Original-issue discount, market discount, premium, and tax-exempt fund distributions add more detail than one marginal-rate formula can capture.

Yield is only one part of a bond comparison

• Credit risk: a municipal issuer, corporation, bank, and the U.S. Treasury do not carry the same repayment risk.
• Call risk: an issuer may redeem a callable bond when reinvestment choices are less attractive.
• Interest-rate risk: a longer-duration bond can lose market value when yields rise.
• Liquidity and spread: the price available to a small investor may differ from a displayed quote.
• Fund costs: an ETF or mutual fund expense ratio reduces the return investors keep.
• Maturity and reinvestment: a six-month bill and a 20-year municipal bond solve different cash-flow problems.

Use the bond price change calculator for a rough duration stress test and the ETF fee drag calculator for recurring fund costs. Those tools still use scenarios and cannot replace the security’s offering documents.

Sources and calculation notes

• IRS Topic 403: Interest received — federal treatment of taxable and tax-exempt interest, including Treasury interest and interest on some state and local obligations.
• IRS Publication 550: Investment Income and Expenses — state and local government obligations, private activity bonds, AMT notes, original-issue discount, and market discount.
• TreasuryDirect: Treasury bills — bill terms, auction purchase methods, interest, and maturity basics.

Method and sources reviewed September 12, 2026. The calculator adds the federal and state/local rates entered for the taxable alternative and caps the combined rate below 100%. It does not model the federal deduction for state and local taxes or determine any security’s tax status.

Educational only. This calculator provides general information, not personalized investment, tax, legal, accounting, or trading advice.