Tax Equivalent Yield Calculator
Convert a municipal yield into the taxable yield you would need to match it — including NIIT and state tax, which most comparisons quietly omit.
Tax Equivalent Yield Calculator
Results recalculate instantly on every keystroke. Nothing you type is transmitted.
What this result does not account for
- Ignores credit risk, duration and call features — this compares tax treatment only.
- Does not model the alternative minimum tax on certain private activity bonds.
- Assumes the municipal bond is in-state for the state exemption shown.
- Uses a single filer's 2026 brackets to locate the marginal rate.
In short: A 3.40% municipal bond held by an investor at a 32% federal bracket, plus 3.8% NIIT and 5% state tax, has a combined marginal rate of 40.80% and a tax-equivalent yield of 5.7432%. A taxable bond must beat that to compete — a 5.25% corporate bond does not.
Formula
Use the marginal rate, never the effective rate. The bond's interest sits on top of your other income, so it is taxed at the highest rate you face, not the average.
Worked Example
- Find the true marginal rate. At $250,000 of taxable income the federal marginal bracket is 32%. Because income exceeds $200,000, the 3.8% NIIT also applies to interest.
- Add the state layer. A 5% state rate brings the combined marginal rate on taxable interest to 40.80%.
- Gross the municipal yield up. 3.40% divided by (1 − 0.4080) gives a tax-equivalent yield of 5.7432%.
- Compare against the actual alternative. The 5.25% corporate bond nets 3.11% after tax, against 3.40% tax-free. The municipal wins by 0.4932% of yield.
- Check the Treasury case separately. Treasuries are exempt from state tax, so the hurdle drops to 5.2960%. The in-state exemption is worth 0.4473% of yield — and on a $100,000 position the municipal advantage is $493.24 a year.
Two refinements separate this from the standard formula. NIIT is frequently omitted, yet it applies to taxable interest and not to municipal interest, so leaving it out understates the municipal advantage. And a Treasury is already state-exempt, so comparing a municipal bond to a Treasury using the full combined rate overstates the case.
Strengths & Limits Of This Model
Where this engine is strong
- Includes the 3.8% NIIT, which most tax-equivalent yield calculators omit entirely.
- Handles the Treasury case separately, since Treasuries are already exempt from state tax.
- Reports the break-even tax rate, so you can see how much your bracket would have to change.
Where it stops
- A tax comparison cannot tell you whether the issuer is creditworthy.
- Municipal interest can still raise the taxable portion of Social Security benefits.
- Does not model the de minimis rule on bonds bought at a market discount.
Practical Use Cases
Choosing between a municipal and a corporate bond fund
Compare the tax-equivalent yield, not the headline yield. At a 40.80% combined rate a 3.40% municipal beats a 5.25% corporate.
Deciding which account holds which bond
Municipal bonds belong in taxable accounts, where the exemption is worth something. Holding them in an IRA wastes it. Compare with the Dividend Tax Calculator.
Testing whether an in-state bond is worth the concentration
The state exemption here is worth 0.4473% of yield. Weigh that against the credit risk of concentrating in a single state's issuers.
Reassessing after an income change
The answer moves with your bracket. Falling out of the 32% band changes the comparison entirely. Recheck with the Tax Bracket Calculator.
Methodology & Editorial Standards
Tax-equivalent yield grosses a tax-exempt yield up by the investor's combined marginal rate: TEY = municipal yield divided by one minus the combined rate. The engine uses the 2026 single-filer ordinary brackets from Rev. Proc. 2025-32 to locate the federal marginal rate, adds the 3.8% net investment income tax under IRC 1411 where taxable income exceeds $200,000, and adds the state rate entered. Interest on most municipal bonds is exempt from federal income tax under IRC 103 and from NIIT, and is generally exempt from state tax in the issuing state. US Treasury interest is exempt from state tax but fully federally taxable, which is why a separate Treasury comparison is shown. The engine does not model the alternative minimum tax that applies to certain private activity bonds, the de minimis rule on market-discount municipal bonds, the taxability of gains on a municipal bond sold before maturity, or the Social Security benefit inclusion calculation that municipal interest feeds into. Credit quality, call features and duration are not considered — this is a tax comparison, not a valuation. The engine implements the standard published formula for this calculation. Inputs are validated for domain and sign before evaluation, and any undefined case returns an em-dash rather than a spurious value.
Computation runs in IEEE-754 double precision at full internal precision; rounding to two decimal places occurs strictly at the display layer, so no cumulative drift enters the result. All monetary outputs use accounting presentation — grouped thousands, two decimals, negatives in parentheses — so figures can be transcribed directly into a model or working paper. Division-by-zero and out-of-domain inputs return an em-dash rather than a misleading number.
This engine was reconciled against an independent reference implementation and hand-verified for the worked example above before release. Our full five-stage review process is published on the About Us page.
Disclaimer. This calculator is provided for informational and modelling purposes only and does not constitute financial, tax, legal, medical, or engineering advice. Verify all figures with a qualified professional before acting on them.
Tax Equivalent Yield Calculator — 20 Expert FAQs
20 analyst-written answers to the questions practitioners actually ask — optimised for voice and answer-engine retrieval.
What is tax-equivalent yield?
The yield a taxable bond must offer to match a tax-free one after tax. Here a 3.40% municipal equals a taxable 5.7432% at a 40.80% combined rate.
Should I use my marginal or effective tax rate?
Marginal, always. The interest stacks on top of your existing income, so it is taxed at the highest rate you face rather than your average rate.
Does NIIT apply to municipal bond interest?
No, and that is part of the advantage. Taxable interest is subject to the 3.8% surtax while municipal interest is exempt from both income tax and NIIT.
Are Treasuries exempt from state tax?
Yes. Treasury interest is exempt from state and local income tax but fully taxable federally, so the municipal hurdle against a Treasury is lower — 5.2960% here.
What is the break-even tax rate?
The combined rate at which the two bonds are equal. Here it is 35.24%: above that the municipal wins, below it the taxable bond does.
Should I hold municipal bonds in my IRA?
No. The exemption is worthless in a tax-deferred account, and you give up the higher yield a taxable bond would have provided.
Is all municipal bond interest tax-free?
Federally, most is. But certain private activity bonds are subject to the alternative minimum tax, and gains on a bond sold before maturity are taxable as capital gains.
Does municipal interest affect my Social Security tax?
Yes. Tax-exempt interest is added back when calculating the taxable portion of Social Security benefits, so it can raise your tax indirectly.
What makes a bond in-state?
Issuance by your own state or its subdivisions. That generally makes the interest exempt from your state tax too, worth 0.4473% of extra yield in this example.
How much is the difference worth in dollars?
On a $100,000 position at these numbers, $493.24 a year in the municipal bond's favour, before considering any credit-quality difference.
Does a lower tax bracket change the answer?
Substantially. The advantage of tax exemption scales directly with your marginal rate, which is why municipals suit high earners and rarely suit low ones.
What is the de minimis rule?
If you buy a municipal bond at a sufficient market discount, the accretion is taxed as ordinary income rather than capital gain. It is not modelled here.
Are municipal bond funds treated the same way?
The interest passes through with its exempt character, but capital gain distributions from the fund are taxable, so the effective advantage is slightly lower.
Can a municipal bond ever lose to a Treasury?
Yes, at lower brackets or when Treasury yields are high. Compare using the Treasury figure shown, not the corporate one, since the state treatment differs.
Does this account for credit risk?
No. A higher municipal yield often reflects weaker credit. This is a tax comparison and should be paired with a credit assessment.
Is this tax equivalent yield calculator free to use?
Yes. It is free, requires no account, and has no usage limits. ApexConverter is funded by contextual advertising, never by selling user data.
Is my data sent to a server?
No. The engine runs as Vanilla JavaScript inside your browser under our Zero-Server Client-Side Execution model. Your figures are computed locally and are never transmitted, logged, or stored.
How accurate is this calculator?
It applies the standard closed-form formula in IEEE-754 double precision, rounding only at the display layer. The engine is reconciled against an independent reference implementation before release.
Does it work on mobile?
Yes. The interface is mobile-first with numeric keypad hints and is tested down to a 320-pixel viewport with no horizontal scrolling.
Can I use it offline?
Largely, yes. Because computation is client-side, the page continues to calculate without a network connection once it has loaded.