Tax-Equivalent Yield
The taxable yield a bond must offer to match a tax-free municipal bond after tax.
Apples to apples
Converts a tax-free yield into the taxable yield that would leave you equally well off.
Use your marginal rate
Enter the rate on your next dollar of income — your top bracket — not your average rate.
What is tax-equivalent yield?
Comparing tax-free and taxable income
Municipal bond interest is usually exempt from federal income tax, so you keep all of it. A taxable bond, by contrast, hands part of its interest to the tax collector. Tax-equivalent yield levels the field: it is the yield a taxable bond would have to pay to leave you with the same money after tax. The US Securities and Exchange Commission's investor education describes this as the standard way to compare the two.
The tax-equivalent yield divides the tax-free yield by the share of income you keep after tax.
TEY = tax-free yield ÷ (1 − marginal tax rate)The denominator, 1 − rate, is the fraction of taxable interest you would actually keep. A smaller denominator — a higher tax bracket — produces a larger tax-equivalent yield, which is why tax-free bonds reward high earners the most.
You are looking at a municipal bond yielding 3.5 %, and your top federal bracket is 32 %.
Find what you keep after tax
In the 32 % bracket you keep 1 − 0.32 = 68 % of taxable interest.Divide the tax-free yield by it
3.5 % ÷ 0.68 = 5.15 %.Compare
A taxable bond must yield 5.15 % to match the tax-free 3.5 % after tax.Decide
If similar taxable bonds yield less than 5.15 %, the muni is the better deal for you.
The same tax-free bond is worth very different amounts to different investors.
12% bracket
3.5% ÷ 0.88 = 3.98% — only a small uplift, so munis rarely win here.
32% bracket
3.5% ÷ 0.68 = 5.15% — a meaningful advantage for a mid-to-high earner.
37% bracket
3.5% ÷ 0.63 = 5.56% — the highest bracket gains the most from tax-free income.
If the bond is also exempt from your state income tax, add your state marginal rate to the federal rate before entering it — that pushes the tax-equivalent yield even higher.
The tax-equivalent yield is the break-even: a taxable bond yielding more than this beats the tax-free bond, and one yielding less loses to it, for your specific tax bracket. The yield pickup shows how many extra percentage points the tax exemption is effectively worth to you. Because the figure depends entirely on your marginal rate, two people can rationally reach opposite conclusions about the same bond — which is exactly why the comparison has to be personalised rather than read off the headline yield.
The formula is simple by design and leaves some things out.
A comparison tool, not tax advice
This calculator uses the basic tax-equivalent yield formula. It does not model the Alternative Minimum Tax that some municipal bonds trigger, the 3.8 % net investment income tax, capital-gains treatment, or state-specific rules, and tax law changes over time. It also says nothing about a bond's credit risk, duration, or liquidity, which matter just as much as yield. It is for education and quick comparison only. Before investing on the strength of a tax comparison, consult a qualified financial advisor or tax professional who can apply your full, current tax situation.