Should I use my marginal or effective tax rate in this calculator?

Use your marginal tax rates for both federal and state. The goal is to compare how your next dollar of investment income is taxed under each option, which is governed by marginal, not average, rates.

How do I know if my muni is exempt from state tax?

In many states, interest from municipal bonds issued by that state or its local governments is exempt from that state’s income tax for residents. Out‑of‑state munis are often taxable. Check the fund’s or bond’s tax disclosures or consult a tax professional if you are unsure.

Does this calculator handle AMT or other special tax rules?

No. Some municipal bonds are subject to the Alternative Minimum Tax or other special rules. If you are in AMT territory or considering private‑activity bonds, talk with a tax advisor before relying on simple TEY comparisons.

Can I use this to compare Treasuries with munis?

Yes. Treasuries are generally exempt from state income tax but fully taxable at the federal level. Set your state tax rate to 0% when modeling Treasuries, and compare their taxable yields to the taxable‑equivalent yields of munis.

Does this calculator factor in fund expenses or bid-ask spreads?

It focuses on headline yields and tax rates. To make finer comparisons, use yields that are net of fund expenses and be aware of trading costs and liquidity differences between instruments.

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Tax-Equivalent Yield Calculator

Convert a tax-free municipal bond yield into a taxable-equivalent yield using your federal and state tax rates.

Results

Taxable-equivalent yield: 4.16%
Combined tax rate: 27.80%

Overview

Municipal bonds pay interest that is often exempt from federal income tax and sometimes from state tax as well. That means you cannot simply compare a muni’s headline yield to a taxable bond’s yield and know which is better—you need to translate the tax‑free yield into a taxable‑equivalent yield based on your own tax situation. This tax‑equivalent yield calculator does that math for you so you can compare munis, corporate bonds, CDs, and Treasuries on an apples‑to‑apples, after‑tax basis.

How to use this calculator

Enter the yield of the tax‑free municipal bond or muni fund you are evaluating, expressed as an annual percentage (for example, 3.0 or 4.25).
Enter your marginal federal income tax rate. This is the bracket that applies to your last dollar of income, not your overall effective rate.
Enter your marginal state income tax rate, or use your state’s supplemental/interest rate if that is how your state treats bond interest.
Use the “State taxes apply to muni?” toggle to indicate whether your state taxes the muni’s interest. For many in‑state munis, state taxes do not apply; out‑of‑state munis may be fully taxable at the state level.
Review the combined marginal tax rate and the resulting taxable‑equivalent yield. Compare that TEY to taxable bond, CD, and Treasury yields you are considering.
Adjust the rates to test different tax scenarios—for example, retirement vs. working years, moving states, or changes in income that might shift you into a higher or lower bracket.

Inputs explained

Muni yield (%): The tax‑free yield on the municipal bond or fund, expressed as an annual percentage. Use the yield to maturity or SEC yield for funds when possible, not just the coupon rate.
Federal tax rate (%): Your marginal federal income tax rate—the rate that applies to your next dollar of ordinary income. This is the correct rate to use when comparing incremental investment income across options.
State tax rate (%): Your marginal state income tax rate on interest income. Some states have flat tax rates, others use brackets. If your state does not tax investment interest, you can leave this at 0%.
State taxes apply to muni?: Indicates whether your state taxes the particular muni bond you are analyzing. In‑state municipal bonds are often exempt from state income tax for residents; out‑of‑state munis may be fully taxable at the state level.

How it works

The key question is: “What yield would a taxable bond need to offer to match the after‑tax income from this tax‑free muni?” To answer it, the calculator first determines the combined marginal tax rate that would apply to taxable bond interest at your federal and state levels.

If the muni is subject to both federal and state income tax, the combined rate is not a simple sum of the two rates because state tax is usually deductible from federal tax only in limited ways. For basic comparisons, we treat the combined rate as FederalRate + StateRate × (1 − FederalRate) when state tax applies, which reflects the fact that state tax is assessed on income after federal tax in many simple models.

If the muni is exempt from state tax—common for in‑state municipal bonds held by residents—the combined rate is just your federal marginal rate, because the state tax bite on that muni income is effectively zero.

Once the combined tax rate is known, the taxable‑equivalent yield (TEY) is calculated by dividing the muni yield by one minus the combined tax rate: TEY = MuniYield ÷ (1 − CombinedTaxRate). This shows the pre‑tax yield a taxable bond would need to produce the same after‑tax cash flow you get from the tax‑free muni.

The calculator outputs both the combined marginal tax rate used in the calculation and the resulting taxable‑equivalent yield, so you can see how sensitive the comparison is to your assumptions about federal and state taxes.

Formula

If state taxes apply to the muni:
  CombinedTaxRate = FederalRate + StateRate × (1 − FederalRate)
Else:
  CombinedTaxRate = FederalRate

TaxableEquivalentYield = MuniYield ÷ (1 − CombinedTaxRate)

When to use it

An investor in a high federal and state tax bracket wants to know whether a 3% in‑state muni is more attractive than a 4.5% corporate bond after taxes.
Someone comparing a national muni fund (subject to state tax) vs. a state‑specific muni fund wants to quantify the value of the extra state tax exemption.
A saver with a ladder of CDs is evaluating whether to shift some assets into munis as their tax situation changes and needs a quick way to convert muni yields into taxable‑equivalent yields.
A retiree considering Treasuries, CDs, and munis side by side wants to see how the state tax exemption on Treasuries and the federal exemption on munis affect the true ranking of yields.

Tips & cautions

Always use marginal tax rates rather than your average or effective tax rate when comparing investments. The key question is how the next dollar of income is taxed, not how all past income was taxed.
Remember that Treasuries are typically exempt from state income tax but fully taxable at the federal level. For Treasuries, you can set the state tax rate to 0% when comparing against munis.
If you are close to a bracket threshold, consider modeling both current and potential higher or lower marginal rates to see how sensitive your decision is to changes in your tax situation.
When comparing funds rather than individual bonds, use yields that are net of fund expenses (such as SEC yield) so you are comparing true investor‑level returns.
The calculator assumes the muni’s interest is fully exempt from federal income tax and, if indicated, from state tax. It does not handle partial exemptions or special cases.
It does not account for the Alternative Minimum Tax (AMT) or other surtaxes that may apply to certain municipal bonds or high‑income investors.
Tax rules for mutual funds and ETFs can differ from individual bonds, especially around capital gains distributions; those details are beyond the scope of this simple yield comparison.
The model focuses only on current income and does not consider credit risk, call features, liquidity, or price volatility, all of which matter when comparing bond investments.

Worked examples

3.0% in-state muni for a 24% federal, 5% state taxpayer

MuniYield = 3.0%; FederalRate = 24%; StateRate = 5%; state taxes on this in‑state muni do not apply.
CombinedTaxRate = FederalRate = 24%.
TaxableEquivalentYield = 3.0% ÷ (1 − 0.24) ≈ 3.0% ÷ 0.76 ≈ 3.95%.
Interpretation: a taxable bond would need to yield about 3.95% to match a 3.0% in‑state muni for this investor.

3.0% out-of-state muni for the same taxpayer

MuniYield = 3.0%; FederalRate = 24%; StateRate = 5%; state taxes apply to this out‑of‑state muni.
CombinedTaxRate = 0.24 + 0.05 × (1 − 0.24) ≈ 0.24 + 0.05 × 0.76 ≈ 0.24 + 0.038 = 27.8%.
TaxableEquivalentYield = 3.0% ÷ (1 − 0.278) ≈ 3.0% ÷ 0.722 ≈ 4.16%.
The same headline muni yield is more valuable in taxable‑equivalent terms when state tax applies, because the taxable alternative would lose more to combined federal and state taxes.

4.0% muni vs taxable CD for a 32% federal, 0% state taxpayer

MuniYield = 4.0%; FederalRate = 32%; StateRate = 0%; state taxes do not apply.
CombinedTaxRate = 32%.
TaxableEquivalentYield = 4.0% ÷ (1 − 0.32) ≈ 4.0% ÷ 0.68 ≈ 5.88%.
A taxable CD would need to yield about 5.9% to match the after‑tax income from the 4.0% muni for this investor.

Deep dive

Use this tax‑equivalent yield calculator to convert a tax‑free municipal bond yield into the taxable yield you would need to match it. By plugging in your marginal federal and state tax rates and indicating whether the muni is state‑taxable, you get a clear taxable‑equivalent yield that makes it easier to compare munis with CDs, corporate bonds, Treasuries, and other income investments.

The tool is especially helpful for investors in high tax brackets, where even modest muni yields can beat seemingly higher taxable yields once you account for taxes. It also highlights the difference between in‑state and out‑of‑state munis by showing how the state tax exemption changes the combined marginal rate and the taxable‑equivalent yield.

Because the inputs are transparent and adjustable, you can rerun scenarios as your income, residency, or tax law changes, and you can share the results with a financial advisor or tax professional when fine‑tuning your portfolio.

FAQs

Should I use my marginal or effective tax rate in this calculator?: Use your marginal tax rates for both federal and state. The goal is to compare how your next dollar of investment income is taxed under each option, which is governed by marginal, not average, rates.
How do I know if my muni is exempt from state tax?: In many states, interest from municipal bonds issued by that state or its local governments is exempt from that state’s income tax for residents. Out‑of‑state munis are often taxable. Check the fund’s or bond’s tax disclosures or consult a tax professional if you are unsure.
Does this calculator handle AMT or other special tax rules?: No. Some municipal bonds are subject to the Alternative Minimum Tax or other special rules. If you are in AMT territory or considering private‑activity bonds, talk with a tax advisor before relying on simple TEY comparisons.
Can I use this to compare Treasuries with munis?: Yes. Treasuries are generally exempt from state income tax but fully taxable at the federal level. Set your state tax rate to 0% when modeling Treasuries, and compare their taxable yields to the taxable‑equivalent yields of munis.
Does this calculator factor in fund expenses or bid-ask spreads?: It focuses on headline yields and tax rates. To make finer comparisons, use yields that are net of fund expenses and be aware of trading costs and liquidity differences between instruments.

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This tax-equivalent yield calculator provides a simplified comparison of tax-free municipal bond yields to taxable yields based on user-supplied marginal tax rates. It does not model the full complexity of federal, state, or local tax law, including AMT, surtaxes, or unique bond structures. Always confirm tax treatment and investment suitability with a qualified tax professional or financial advisor before making decisions based on these estimates.