Tax-Equivalent Yield: Muni vs Taxable Bonds

A municipal bond yields 3.5%. A corporate bond yields 5%. Which one is better for you? You can't compare them directly—the muni is tax-free, the corporate isn't. Tax-equivalent yield (TEY) solves this by asking: what would a taxable bond need to yield to match the muni's after-tax return?

If you're in the 32% federal bracket, that 3.5% muni is equivalent to a 5.15% taxable bond. Suddenly the muni looks better than the 5% corporate. In the 22% bracket? The same muni equals only 4.49%—now the corporate wins.

This calculator converts muni yields to their taxable equivalent so you can make apples-to-apples comparisons. Essential for anyone in the 24%+ bracket evaluating bond options for taxable accounts.

The formula reveals why munis shine for high-bracket investors. At 37% + 3.8% NIIT, a 3.5% muni equals 5.91% taxable. At 12%, that same muni equals only 3.98%.

Example 1: High-Bracket California Investor

Linda is a California resident in the 32% federal bracket. She's comparing a California muni yielding 3.2% to a corporate bond yielding 5.0%.

The 3.2% California muni equals a 5.19% taxable yield for Linda. It beats the 5.0% corporate—the muni wins. If she bought an out-of-state muni, she'd lose the state exemption and the TEY drops to 4.71%.

Example 2: Lower-Bracket Texas Investor

James lives in Texas (no state income tax) and is in the 22% federal bracket. He's evaluating the same 3.2% muni.

For James, the 3.2% muni equals only 4.10% taxable. The 5.0% corporate is the better deal—he keeps more after taxes with the taxable bond. Same muni, different investor, different answer.

Use It For:

• Comparing muni vs. corporate bonds: Convert muni yields to taxable-equivalent before deciding
• In-state vs. out-of-state munis: See how the state tax exemption changes the math
• High-earner planning: Factor in NIIT to see the full tax advantage
• Taxable account allocation: Decide which bonds belong in taxable vs. retirement accounts
• Break-even analysis: Find the tax rate where you'd be indifferent between two bonds

Don't Rely on It For:

• Credit risk comparison: A muni's higher TEY doesn't mean it's safer—check ratings
• AMT-affected bonds: Some private activity munis are taxable under AMT
• IRA/401(k) holdings: Munis waste their tax-free status in tax-deferred accounts
• Bond pricing: We calculate yield equivalence, not market values or total return

We take your marginal federal rate, add state rate (adjusted for SALT deductibility logic), include NIIT if applicable, and apply the TEY formula. For in-state munis, both federal and state exemptions apply. For out-of-state munis, only federal exemption counts.

What we include: Federal marginal rates (10%–37%), state tax rates, 3.8% NIIT option, in-state vs. out-of-state toggle, break-even tax rate calculation, and side-by-side comparison mode.

What we don't include: AMT exposure, local surcharges (NYC, etc.), bond credit ratings, duration/interest rate risk, or call provisions. This is a yield comparison tool—full bond analysis requires additional due diligence.