This tax equivalent yield calculator puts municipal bonds and taxable bonds on one scale: it converts a tax-exempt muni yield into the taxable yield you’d need to match it after tax, at your federal and state rates.

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The Yield You Keep Is the Only Yield

Municipal bond interest is exempt from federal income tax — and from state tax too, if the bond is issued in your state. That exemption makes muni yields look deceptively small next to taxable bonds, until you convert: TEY = muni yield ÷ (1 − tax rate). A 3.5% muni for an investor in the 32% federal bracket is worth what a 5.15% taxable bond pays — because the taxable bond’s 5.15% surrenders 32% to tax and lands at the same 3.5% take-home. Add a 5% state exemption on an in-state bond and the combined rate becomes 1 − (0.68 × 0.95) = 35.4%, lifting the TEY to 5.42%. This is the entire sales pitch of the muni market, and it is pure arithmetic: the higher your bracket, the more the exemption is worth, which is why munis are a rich-taxpayer instrument and why their yields are quoted pre-converted in every serious bond shop.

The comparison discipline matters as much as the formula. TEY tells you what a taxable alternative must beat; it does not tell you the muni is a good bond. Credit quality (a shaky city’s 5.42% TEY vs a Treasury’s certainty), liquidity, call provisions and duration all sit outside this ratio. And the tax details have traps: some muni interest (private-activity bonds) is taxable under the AMT; muni capital GAINS are fully taxable — only the interest is exempt; market-discount munis convert part of the return into taxable income; and the state exemption generally requires an in-state issuer, which is why this calculator makes the state rate an explicit, default-zero input rather than a silent assumption. Social Security taxation and Medicare IRMAA thresholds are two more places muni income is treated specially (it counts toward both) — the TEY is the start of the muni conversation, never the whole of it.

Worked Examples (Verified)

  • Defaults: 3.5% muni, 32% federal → TEY = 3.5/0.68 = 5.15%.
  • In-state with 5% state rate: combined 35.4% → TEY = 3.5/0.646 = 5.42%.
  • Top bracket: 37% federal + 3.8% NIIT-era effective ≈ 40.8% → 3.5/0.592 = 5.91% — the exemption at full power.
  • Low bracket: 12% federal → TEY = 3.5/0.88 = 3.98% — barely better than headline; low-bracket investors are usually better in taxable bonds.

Tax Equivalent Yield Discipline

  • Use your MARGINAL rate, not your average/effective rate — the muni shelters income at the top of your stack.
  • State rate counts only for in-state bonds (or state-exempt funds); an out-of-state muni is state-taxable in most states — default it to 0 unless verified.
  • TEY compares yields, not risks: adjust for credit quality, call risk and liquidity before declaring a winner.
  • Only interest is exempt — capital gains on munis are taxable, and deep-discount munis can convert return into ordinary income (de minimis rule).
  • Inside tax-advantaged accounts (IRA/401k), munis are almost always wrong: the exemption is wasted where nothing is taxed anyway.

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Frequently Asked Questions

How do you calculate tax equivalent yield?

TEY = tax-exempt yield ÷ (1 − marginal tax rate). At a 32% federal bracket, a 3.5% muni yield becomes 3.5 ÷ 0.68 = 5.15% — the taxable yield that leaves you equally well off after tax. With state tax on an in-state bond, combine the rates as 1 − (1 − federal)(1 − state): 32% federal + 5% state = 35.4% combined, and the TEY rises to 5.42%. This calculator handles both layers.

Who benefits most from municipal bonds?

High-bracket investors holding bonds in taxable accounts. The exemption’s value is proportional to the rate avoided: at 12% federal the 3.5% muni is worth only 3.98% taxable-equivalent, while at a ~40.8% top combined rate it is worth 5.91% — which is why muni demand concentrates in top brackets and why low-bracket investors usually earn more in Treasuries or corporates of similar quality. The crossover is a calculation, not a slogan: your bracket, run through this formula, is the answer.

Are municipal bonds exempt from state tax too?

Generally only when issued within your state of residence (and a few territories like Puerto Rico are exempt everywhere). An out-of-state muni’s interest is typically taxable by your home state, though always federal-exempt. This is why the calculator’s state input defaults to 0 and why national muni funds report a state-by-state exemption percentage — for a New York or California investor, an in-state fund’s extra exemption at 5–13% state rates materially raises the TEY.

Is muni interest really 100% tax-free?

Federal income tax on the INTEREST: yes, for standard governmental munis. The exceptions that matter: private-activity bond interest can be taxed under the alternative minimum tax; capital gains from selling a muni are taxable; bonds bought at a market discount beyond the de minimis threshold convert some gain into ordinary income; and muni interest still counts in the formulas for taxing Social Security benefits and setting Medicare IRMAA premiums. “Tax-free” is a strong default with fine print — the interest on a plain in-state general-obligation bond is the clean case.

Should I hold munis in my IRA?

Almost never. An IRA already shelters its contents from tax, so the muni’s exemption buys nothing — you’re accepting the muni’s characteristically lower pre-tax yield for a benefit the account already provides free. Asset-location discipline says: taxable bonds (whose interest NEEDS shelter) belong in the IRA; munis, if your bracket justifies them, belong in the taxable account where the exemption actually operates. Reversing the pairing is one of the most common and most expensive quiet mistakes in retail portfolios.

How do I compare a muni with a Treasury using TEY?

Convert the muni to TEY at the federal rate only (Treasuries are state-exempt but federally taxed, so the federal comparison is the clean one — if you include state, the Treasury needs a smaller adjustment, not the muni a bigger one; the standard desk method compares federal TEY against the Treasury yield and separately favors the muni on state tax). Then adjust for credit: a Treasury is risk-free, a muni is not, so the muni’s TEY should win by a margin that compensates its credit and liquidity — not merely tie.

What tax rate should I enter?

Your marginal combined rate — the rate on your next dollar of interest income. Federal marginal bracket, plus the state marginal rate if the bond is in-state exempt, plus (for high earners) the 3.8% net investment income tax where it applies to the taxable alternative. Not your effective (average) rate, which understates the sheltering value. If your income straddles a bracket boundary, test both adjacent brackets — the calculator’s sensitivity is one keystroke.

Is this tax equivalent yield calculator free?

Yes — free, instant, no sign-up. Enter the muni yield and your federal and state marginal rates for the combined rate and tax equivalent yield.