Tax-Equivalent Yield Calculator
Calculate tax-equivalent yield from your own entered figures.
Loading calculator…
Currency: Amounts are calculated in the currency you select; this site does not convert between currencies and does not use live exchange rates.
What this tool does
Calculate tax-equivalent yield from your own entered figures. Compares yields only: the taxable and tax-exempt bonds should have similar credit quality, maturity and call features, and some private-activity muni interest can be an AMT preference item. State exemption generally applies only to bonds issued in your own state.
How to use the Tax-Equivalent Yield Calculator
- Enter or select tax-exempt (muni) yield (%).
- Enter or select federal marginal tax rate (%).
- Enter or select state marginal tax rate (%) — only if this bond is also exempt from your state tax.
- Read the calculated result; change any measurement to compare alternatives.
Formula
tax-equivalent yield=tax-exempt yield/(1−combined marginal rate), where the combined marginal rate is the federal rate plus the state rate you enter; federal-only TEY uses the federal rate alone
- exemptYield
- Tax-exempt (muni) yield (%)
- federalRate
- Federal marginal tax rate (%)
- stateRate
- State marginal tax rate (%) — only if this bond is also exempt from your state tax
Compares yields only: the taxable and tax-exempt bonds should have similar credit quality, maturity and call features, and some private-activity muni interest can be an AMT preference item. State exemption generally applies only to bonds issued in your own state.
Worked example
For tax-equivalent yield calculator, the following measurements illustrate the exact method: Tax-exempt (muni) yield (%): 4; Federal marginal tax rate (%): 24; State marginal tax rate (%) — only if this bond is also exempt from your state tax: 0.
Inputs
- Tax-exempt (muni) yield (%)4
- Federal marginal tax rate (%)24
- State marginal tax rate (%) — only if this bond is also exempt from your state tax0
Result
- Tax-equivalent yield (%)5.26
- Federal-only tax-equivalent yield (%)5.26
- Combined marginal rate used (%)24
- Yield advantage over the exempt yield (percentage points)1.26
Results explained
- Tax-equivalent yield (%)
- Tax-equivalent yield (%) from the formula above. Compares yields only: the taxable and tax-exempt bonds should have similar credit quality, maturity and call features, and some private-activity muni interest can be an AMT preference item. State exemption generally applies only to bonds issued in your own state.
- Federal-only tax-equivalent yield (%)
- Federal-only tax-equivalent yield (%) from the formula above. Compares yields only: the taxable and tax-exempt bonds should have similar credit quality, maturity and call features, and some private-activity muni interest can be an AMT preference item. State exemption generally applies only to bonds issued in your own state.
- Combined marginal rate used (%)
- Combined marginal rate used (%) from the formula above. Compares yields only: the taxable and tax-exempt bonds should have similar credit quality, maturity and call features, and some private-activity muni interest can be an AMT preference item. State exemption generally applies only to bonds issued in your own state.
- Yield advantage over the exempt yield (percentage points)
- Yield advantage over the exempt yield (percentage points) from the formula above. Compares yields only: the taxable and tax-exempt bonds should have similar credit quality, maturity and call features, and some private-activity muni interest can be an AMT preference item. State exemption generally applies only to bonds issued in your own state.
Frequently asked questions
Divide the tax-exempt yield by 1 minus your marginal tax rate. A 4% muni yield at a 24% federal marginal rate gives 4 ÷ (1 − 0.24) = 5.263% — a taxable bond must yield more than that to beat the muni after tax.
Marginal — the rate on your next dollar of interest income — because that is the rate the taxable bond's interest would actually be taxed at. Your effective (average) rate understates it and flatters the taxable bond.
Only when the muni bond is exempt from your state income tax too, which generally means bonds issued by your own state or its municipalities. Out-of-state muni interest is usually taxable by your home state, so leave the state rate at zero for those.
Compare the taxable bond's yield with the TEY, not with the muni's headline yield. If a taxable bond yields 5.5% and your TEY is 5.263%, the taxable bond pays slightly more after tax — assuming equal credit quality, maturity and call risk.
Not automatically. Interest on some private-activity munis is an alternative minimum tax preference item, and taxable (not muni) interest can face the 3.8% NIIT at higher incomes. If NIIT applies to you, add it to the federal rate you enter.
Yield differences also pay for credit risk, duration risk and call risk. TEY only removes the tax difference, so it is a fair comparison only between bonds that are alike in everything else.