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Finance Calc Kit
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Taxable Equivalent Yield Calculator

Calculate the Taxable Equivalent Yield (TEY) of tax-free municipal bonds versus corporate/taxable bonds based on federal and state tax brackets.

%

Nominal yield on a municipal or other tax-free bond.

%

Your top federal income tax bracket on ordinary interest income.

%

Marginal state income tax rate on taxable bond interest.

$

Principal invested to show annual dollar income and tax savings.

Taxable equivalent yield (TEY)

6.34%

Taxable yield needed to match 4.50% tax-free at a 29.0% combined rate

Combined marginal tax rate

29.00%

Federal 24.0% + state 5.0%

Annual taxes saved

$183.80

Extra tax on an equivalent taxable bond

Annual tax-free income

$450.00

4.50% on $10,000.00

Equivalent gross taxable income

$633.80

6.34% before taxes

Equivalent taxable income breakdown

Gross taxable income needed$633.80
  • After-tax income (muni equivalent)$450.0071.0%
  • Taxes paid on taxable bond$183.8029.0%

How taxable equivalent yield is calculated

Convert a tax-exempt municipal bond yield into the pre-tax yield a taxable bond must pay to deliver the same after-tax income.

  1. 1. Combine federal and state marginal tax rates

    t=tfederal+tstate=24%+5%=29.00%t = t_{\text{federal}} + t_{\text{state}} = 24\% + 5\% = 29.00\%

    Your combined marginal rate on ordinary taxable interest is 29.00%. This calculator uses a simple sum of federal and state brackets.

  2. 2. Apply the taxable equivalent yield formula

    TEY=Tax-Exempt Yield1−t=4.50%1−0.2900=6.34%\text{TEY} = \frac{\text{Tax-Exempt Yield}}{1 - t} = \frac{4.50\%}{1 - 0.2900} = 6.34\%

    A 4.50% tax-free yield equals a 6.34% taxable yield for an investor in the 29.0% bracket.

  3. 3. Compare annual dollar income

    Tax-Free Income=P×yexempt,Taxable Gross=P×TEY\text{Tax-Free Income} = P \times y_{\text{exempt}}, \quad \text{Taxable Gross} = P \times \text{TEY}

    On $10,000.00, the muni pays $450.00 after tax. A taxable bond must generate $633.80 gross, of which $183.80 goes to taxes.

Tax Reference Note (2025): Federal marginal income tax brackets and state rates change annually. This calculator uses your entered federal and state marginal rates rather than fixed bracket tables. Municipal bond interest is generally exempt from federal income tax; in-state bonds may also be exempt from state and local taxes. Certain private activity bonds may be subject to the Alternative Minimum Tax (AMT). Consult a tax professional for your specific situation.
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What Is Taxable Equivalent Yield (TEY)?

Taxable Equivalent Yield (TEY) is the pre-tax yield a fully taxable bond must pay to deliver the same after-tax income as a tax-exempt municipal bond. Because interest from qualifying municipal bonds is generally exempt from federal income tax and often from state and local taxes, a lower nominal muni yield can produce more net income than a higher-yielding corporate bond or certificate of deposit.

TEY is essential for fixed-income investors comparing municipal bonds against taxable alternatives such as corporate bonds, Treasury notes, or high-yield savings accounts. To evaluate coupon cash flows on taxable bonds, use the coupon payment calculator. For broader bond pricing and yield-to-maturity analysis, see the bond calculator and bond current yield calculator.

The Taxable Equivalent Yield Formula

The standard formula divides the tax-exempt yield by one minus your combined marginal tax rate:

TEY=Tax-Exempt Yield1−t\text{TEY} = \frac{\text{Tax-Exempt Yield}}{1 - t}

Where tt is your combined federal and state marginal income tax rate expressed as a decimal. For example, a 32% combined rate means t=0.32t = 0.32.

Worked Example: 3% Muni vs. 32% Tax Bracket

An investor in the 32% combined marginal bracket considering a 3.00% tax-exempt municipal bond would need a taxable bond yielding at least 4.41% to break even on an after-tax basis:

TEY=3.00%1−0.32=3.00%0.68=4.41%\text{TEY} = \frac{3.00\%}{1 - 0.32} = \frac{3.00\%}{0.68} = 4.41\%

On a $100,000 investment, the muni generates $3,000 in tax-free annual income. A taxable bond must pay $4,411 gross, of which $1,411 goes to taxes, leaving the same $3,000 net. If taxable corporate bonds are offering less than 4.41%, the municipal bond delivers higher after-tax income.

Federal and State Tax Rates for 2025

This calculator accepts your federal and state marginal tax rates as inputs rather than applying fixed bracket tables, because your effective rate depends on filing status, total taxable income, deductions, and the state where you reside. For the 2025 tax year, federal ordinary income brackets range from 10% to 37%, while state rates vary from 0% (no income tax) to over 13% in high-tax jurisdictions.

The combined rate in this calculator is the simple sum of federal and state marginal rates. Some investors in states that allow a federal tax deduction for state taxes paid may experience a slightly lower effective combined rate. Investors subject to the Alternative Minimum Tax (AMT) on certain private activity municipal bonds should factor AMT into their effective rate.

Comparing Tax-Exempt Municipal Bonds vs. Taxable Bonds

Municipal bonds are debt securities issued by states, cities, counties, and other government entities to fund public projects. Interest on most general obligation and revenue bonds is exempt from federal income tax under Internal Revenue Code Section 103. Bonds issued within your home state may also be exempt from state and local income taxes, amplifying the after-tax advantage.

Taxable bonds, including corporate bonds and most CDs, pay interest that is fully subject to federal and state income taxes. The TEY calculation levels the playing field by translating the muni yield into a taxable benchmark. You can also compare short-term discount instruments using the bond equivalent yield calculator or analyze inflation-adjusted returns with the real interest rate calculator.

Annual Tax Savings Formula

The annual dollar tax savings from choosing a tax-exempt bond over an equivalent taxable bond on principal PP is:

Annual Tax Savings=P×(TEY−Tax-Exempt Yield)\text{Annual Tax Savings} = P \times (\text{TEY} - \text{Tax-Exempt Yield})

This represents the additional gross income a taxable bond must generate, all of which would be consumed by taxes to match the muni's after-tax cash flow.

Frequently asked questions

Are all municipal bonds completely tax-free?
Most municipal bond interest is exempt from federal income tax. To qualify for state tax exemption, the bond usually must be issued by your home state or local municipality. Interest on out-of-state munis is typically taxable at the state level even when federally exempt.
Who benefits most from calculating taxable equivalent yield?
Investors in higher federal and state income tax brackets benefit the most from municipal bonds and TEY analysis. As marginal tax rates rise, the taxable yield required to match a given muni yield increases proportionally.
Does the Alternative Minimum Tax (AMT) affect TEY?
Certain private activity municipal bonds are subject to the federal Alternative Minimum Tax. Investors subject to AMT should evaluate AMT-free municipal bonds or include AMT in their effective tax rate when calculating TEY.
How do I calculate annual tax savings using TEY?
Multiply your investment principal by the difference between TEY and the tax-exempt yield. For example, on $50,000 with a 4.41% TEY and 3.00% muni yield, annual tax savings equal $50,000 × (4.41% − 3.00%) = $705.
Which tax year does this calculator use?
The calculator uses your entered federal and state marginal tax rates rather than fixed 2025 bracket tables. Tax bracket guidance in the article and calculator notice reflects the 2025 tax year. Verify current IRS and state rates before making investment decisions.
Should I use combined federal and state rates or federal only?
Use the combined federal plus state marginal rate for bonds taxed at both levels, such as corporate bonds and out-of-state munis. If comparing in-state municipal bonds that are exempt from both federal and state taxes, include both rates in your combined marginal rate.

Resources and references

The formulas and methods in this calculator were checked against these independent sources.