Tax-Equivalent Yield Calculator 2025 β Muni vs Taxable Bonds
Calculate the tax-equivalent yield of municipal bonds vs taxable bonds. Find whether munis or Treasuries are better for your tax bracket.
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Tax-exempt (federally) %
0% for TX, FL, etc. Include if muni is in-state %
e.g. Treasury or corporate bond yield $
0%
Tax-Equivalent Yield
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Muni After-Tax Yield
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Taxable After-Tax Yield
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Better Investment
Annual Income Comparison
How Tax-Equivalent Yield Works
A municipal bond pays a lower nominal yield than a taxable bond but the income is exempt from federal (and sometimes state) income tax. The tax-equivalent yield tells you what a taxable bond would need to yield to give you the same after-tax income as the muni.
If the muni's TEY is higher than available taxable yields, the muni is the better choice. If lower, go with the taxable bond.
The Formula
TEY (federal only exempt) = Muni Yield Γ· (1 β Federal Rate)
TEY (both exempt) = Muni Yield Γ· (1 β Federal Rate β State Rate)
After-Tax Taxable Yield = Taxable Yield Γ (1 β Federal Rate β State Rate)
Muni wins if: Muni Yield > Taxable Yield Γ (1 β marginal rate)
TEY (both exempt) = Muni Yield Γ· (1 β Federal Rate β State Rate)
After-Tax Taxable Yield = Taxable Yield Γ (1 β Federal Rate β State Rate)
Muni wins if: Muni Yield > Taxable Yield Γ (1 β marginal rate)
Example
Investor in 32% federal bracket, 5% state, $100K investment:
Muni yield: 3.5% (in-state, both exempt) | Taxable yield: 5.0%
TEY = 3.5% Γ· (1 β 0.32 β 0.05) = 3.5% Γ· 0.63 = 5.56%
Muni TEY (5.56%) > Taxable (5.0%) β Muni is BETTER
Annual muni income: $3,500 (tax-free) vs $5,000 Γ 63% = $3,150 (taxable after-tax)
Muni yield: 3.5% (in-state, both exempt) | Taxable yield: 5.0%
TEY = 3.5% Γ· (1 β 0.32 β 0.05) = 3.5% Γ· 0.63 = 5.56%
Muni TEY (5.56%) > Taxable (5.0%) β Muni is BETTER
Annual muni income: $3,500 (tax-free) vs $5,000 Γ 63% = $3,150 (taxable after-tax)
Extended
Muni vs Taxable Bond Comparison
Full comparison table showing break-even yields across all federal tax brackets
TEY for current muni yield across all federal tax brackets (at your state rate).
| Federal Bracket | Combined Rate | Muni TEY | Muni After-Tax | Taxable After-Tax | Winner |
|---|
5-year income accumulation: muni vs taxable bond at your investment amount.
| Year | Muni Income (tax-free) | Taxable After-Tax Income | Cumulative Advantage |
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Frequently Asked Questions
What is tax-equivalent yield?
Tax-equivalent yield (TEY) is the pre-tax return that a taxable bond would need to provide to match the after-tax return of a tax-exempt bond (like a municipal bond). Formula: TEY = Tax-free yield Γ· (1 β marginal tax rate). For example, a 4% muni bond is equivalent to a 5.13% taxable bond for someone in the 22% bracket.
When are municipal bonds better than taxable bonds?
Municipal bonds are typically better for investors in higher tax brackets. The higher your combined federal + state tax rate, the more valuable the tax exemption becomes. As a rule of thumb, munis become attractive when TEY exceeds comparable taxable yields. For investors in lower brackets (10-12%), taxable bonds usually offer better after-tax returns.
Are all municipal bonds tax-exempt?
Most municipal bonds are federally tax-exempt, but not all are exempt from state tax. "Double tax-exempt" bonds (exempt from both federal and state tax) are most valuable for in-state investors. Some munis are subject to the Alternative Minimum Tax (AMT). Always verify the tax status of the specific bond with your broker.
How do I calculate my marginal tax rate for TEY?
Your relevant marginal rate for TEY should include both federal and state income tax rates. If you are in the 22% federal bracket and live in California (marginal rate 9.3%), your combined marginal rate is approximately 31.3% for federal munis and 31.3% for state-issued munis (which are exempt from CA state tax too). This calculator lets you input both rates.
What is the break-even yield for municipal bonds?
The break-even point is when the muni TEY equals the taxable yield available in the market. If 10-year Treasuries yield 4.5% and your combined marginal rate is 35%, a muni yielding above 4.5% Γ (1-0.35) = 2.925% beats Treasuries on an after-tax basis. Higher tax rates raise the break-even, making munis more attractive.