Tax-equivalent yield is the taxable yield you would need to match a tax-free one, given your marginal tax rate.
The tax-free yield, and the rate you would otherwise pay
The offer and your rate
%
Yield on a tax-exempt investment, such as a municipal bond.
%
Your top tax rate on the taxable interest the bond would otherwise be compared against. Rates vary by country and bracket — verify current rates with the IRS or a tax professional.
Estimates only — not financial, tax, or professional advice.
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What it calculates: Tax-Equivalent Yield, Extra Yield Needed, Tax-Free Yield.
Updated 5 June 2026 · Transparent assumptions
At a 32% rate it is worth 5.15% before tax
Dividing the tax-free yield by one minus the marginal rate gives the taxable yield that would leave the same amount after tax: 3.5% / 0.68 = 5.15%. A taxable bond must pay more than 5.15% to beat it, and one paying 5% does not.
This single conversion is what makes municipal bonds comparable to corporates and Treasuries. Comparing a 3.5% muni against a 5% corporate on headline yield alone picks the wrong one for anyone in a high bracket, and it is the most common error in fixed-income comparison for individual investors.
The same bond is worth 4.38% at 20% and 5.56% at 37%
Because the divisor is one minus your marginal rate, the tax-equivalent yield rises steeply with the bracket. The same 3.5% municipal bond converts to 4.38% for someone at 20%, 5.15% at 32%, and 5.56% at 37%.
That is why municipal bonds are marketed to high earners and are frequently a poor choice for anyone else. Below roughly a 24% bracket, taxable bonds of comparable credit usually win outright, and the tax exemption is not worth the lower headline yield or the narrower market.
A bond exempt from both federal and state tax converts at a higher rate still
The marginal rate entered should include every tax the taxable alternative would attract. A municipal bond issued in your own state is typically exempt from state income tax as well as federal, so the correct divisor uses the combined rate — which for a high earner in a high-tax state can exceed 45%.
The reverse also applies: an out-of-state municipal bond is usually federally exempt but state-taxable, so it converts at the federal rate alone. Treasury securities invert it again, being state-exempt and federally taxable. Each combination needs its own rate in the divisor.
Credit, liquidity and the taxes it cannot see
Tax-equivalent yield equalises the tax treatment and nothing else. Municipal issuers vary enormously in credit quality, the market is far less liquid than Treasuries, and bid-ask spreads on small retail lots can consume a meaningful share of the yield advantage.
Some municipal income is also subject to the alternative minimum tax, and capital gains on a municipal bond sold before maturity are taxable regardless of the exemption on its interest. The exemption covers the coupon, not the whole investment.
Sources & References
Figures on this page are checked against primary, authoritative sources. Links open in a new tab.
Bond YieldYield to maturity, current yield, and annual coupon income from price, face value, and coupon rate.
Capital Gains TaxFederal capital gains tax with the short-term and long-term treatments side by side, so the holding-period cliff is visible.
InvestmentProject lump-sum and regular-contribution growth, plan a goal, and solve future vs present value, with fees and inflation.
Regular InvestmentProject how regular monthly contributions grow over time — SIP-style investing, dollar-cost averaging, inflation-adjusted value, and long-term goals.
Returns are assumptions, not guarantees. Actual results may vary because of market performance, taxes, fees, inflation, and timing. This is an educational projection, not investment advice.
Published the calculator with its formula, worked example, assumptions, limitations and a bespoke guide, and added an automated formula test suite covering it.
Tested the tax-free to taxable conversion across marginal rates, including the zero-rate case where the two yields must be identical.
Tested that the required taxable yield rises monotonically with the marginal rate and always meets or exceeds the tax-free yield.
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