The municipal bond tax-equivalent yield calculator shows what pretax yield a taxable bond must offer to match your muni bond's after-tax return. Municipal bonds are exempt from federal income tax — and often state tax too — making them especially valuable for investors in high tax brackets.
For comparison — e.g., 10-year Treasury yield
How to Use the Muni Bond Calculator
The tax-equivalent yield formula is straightforward: TEY = Muni Yield ÷ (1 − Tax Rate). If you're in the 35% federal bracket and buy a 3.5% muni: TEY = 3.5% ÷ 0.65 = 5.38%. This means a taxable bond must yield over 5.38% to beat your muni after taxes.
Combining Federal and State Exemptions
In-state munis can be exempt from both federal (up to 37%) and state income tax (0-13%). For a California resident in the top bracket, the combined exemption approaches 50%, making even modest muni yields very competitive. A 3% in-state CA muni could be equivalent to a 6%+ taxable yield for some investors.
FAQ
What is tax-equivalent yield?
Tax-equivalent yield (TEY) is the pretax yield a taxable bond must offer to match the after-tax yield of a tax-exempt municipal bond. Formula: TEY = Muni Yield ÷ (1 − Your Tax Rate). If you're in the 35% bracket, a 3% muni equals a 4.62% taxable yield.
Are municipal bonds always federal tax-exempt?
Most municipal bonds are exempt from federal income tax. However, some munis (like private activity bonds) may be subject to the Alternative Minimum Tax (AMT). Always verify with the bond prospectus.
Are municipal bonds state tax-exempt?
Municipal bonds are generally exempt from state income tax in the state where they were issued. If you buy a California muni while living in California, it's double-tax-exempt (federal + state). If you live in New York, you'd only get the federal exemption.
Who benefits most from muni bonds?
Muni bonds are most advantageous for investors in the highest tax brackets (32%+). At lower brackets, the tax-equivalent yield of munis often doesn't beat corporate or Treasury yields. High-tax states like California, New York, and New Jersey amplify the benefit further.