Tax-Equivalent Yield Calculator United States

What the tax-equivalent yield calculator does

Municipal bond interest is generally exempt from federal income tax and often from state tax, so a muni that yields less on paper can leave you with more after tax than a taxable bond. This calculator converts a tax-free yield into the taxable yield it is worth to you. Enter the muni's yield, your federal marginal rate, your state rate if the bond is state-tax-exempt, the 3.8% net investment income tax if it applies, and the yield of a taxable bond you are considering. It shows the equivalent taxable yield and which bond comes out ahead after tax.

How tax-equivalent yield works

The tax-equivalent yield is the municipal yield divided by one minus your combined marginal tax rate. A taxable bond has to hand part of its yield to the government, so it must start higher to finish level with a tax-free one.

The combined rate adds up the rates that would apply to taxable interest: your federal marginal rate, your state marginal rate when the muni is also state-tax-exempt, and the 3.8% net investment income tax if your income triggers it. One minus that total is the share of a taxable yield you keep, and dividing the muni yield by it gives the taxable equivalent.

Why the marginal rate matters

Use your marginal rate, the rate on your next dollar of income, not your average rate. Munis are most valuable in high brackets, where more of any taxable interest would go to tax. In a low bracket the exemption is worth less, and a taxable bond with a higher headline yield may win. The same bond can be a good buy for one investor and a poor one for another.

Federal, state, and the net investment income tax

Every investor should include the federal rate. A bond issued in your home state is usually exempt from that state's income tax as well, so add your state rate; a bond from another state is generally still taxable at the state level, so leave the state rate at zero.

The net investment income tax is a 3.8% surtax on investment income once modified adjusted gross income passes certain thresholds. Municipal bond interest is exempt from it, so if it would apply to your taxable interest, including it raises the muni's tax-equivalent yield. It has its own field so you can add it only when it applies.

Reading your result

The main output is the tax-equivalent yield. Alongside it are your combined marginal rate, the after-tax yield of the taxable bond you entered, and the muni's advantage over it. A positive advantage means the muni wins for you; a negative one means the taxable bond leaves you with more. Comparing after-tax figures avoids the common mistake of setting a pre-tax yield against an after-tax one.

This is an estimate to guide a comparison, not tax advice. A bond's total return also depends on credit quality, duration and price, not yield alone. Rerun the comparison when a raise, a move to another state or crossing a surtax threshold changes your rates, whether you are buying individual bonds, comparing bond funds, or deciding where to hold income-producing assets.

This is general information only and not financial advice.

About This Tax Equivalent Yield Calculator

Use this tax equivalent yield calculator to get an instant estimate based on the figures you enter. Adjust the inputs above to match your situation, or browse all our calculators to plan your next step.