Tax-Equivalent Yield Calculator
Compare taxable and tax-free yields on an equal footing.
A taxable investment would need to yield 6.67% to match the after-tax return of a 5.00% tax-free yield at your 25.0% marginal tax rate.
Tax Equivalent Yield vs. Rate of Return
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Tax-free municipal bonds usually carry lower headline yields than comparable taxable bonds, but that's not the whole story: because their interest escapes federal (and sometimes state) income tax, their after-tax return can beat a higher-yielding taxable bond. The taxable-equivalent yield puts both on the same footing.
Want to see how a rate actually compounds into a balance over time? Try our compound interest calculator for the underlying mechanic, before taxes enter the picture.
This calculator converts a tax-free yield into the pre-tax yield a taxable bond would need to match it, given your marginal tax rate: the number you actually need to compare investments fairly.
How does this calculator work?
Enter the yield on a tax-free bond (such as a municipal bond) and your marginal federal tax rate, plus your state tax rate if applicable.
The calculator returns the taxable-equivalent yield: the yield a taxable bond would need to match the tax-free bond's after-tax return.
Compare that figure to taxable bonds you're considering; if a taxable bond yields more, it may be the better after-tax choice.
Worked example
Compare a 3.5% tax-free muni for an investor in a 32% federal bracket against taxable bonds.
- Rate of Return
- 3.50%
- Marginal tax rate
- 32%
- Taxable-equivalent yield
- 5.15%
- A taxable bond at 4.8% → after tax
- 3.26%
How the numbers work
The taxable-equivalent yield is the tax-free yield divided by one minus your tax rate: 3.5% ÷ (1 − 0.32) = 3.5% ÷ 0.68 ≈ 5.15%.
To check a specific taxable bond from the other direction, multiply its yield by (1 − tax rate): a 4.8% corporate bond keeps 4.8% × 0.68 = 3.26% after tax, less than the muni's 3.5%, so the muni wins for this investor.
The 3.5% muni is equivalent to a 5.15% taxable bond for this investor. A taxable bond would need to yield more than 5.15% to beat it, so a 4.8% corporate bond (worth only 3.26% after tax) is actually the worse deal here.
The higher your tax bracket, the more valuable tax-free income becomes, which is why muni bonds tend to favor high earners.
Tax-Equivalent Yield Calculator glossary
- Rate of Return
- The yield on the tax-free bond you're evaluating.
- Marginal Tax Rate
- The tax rate on your next dollar of income: the relevant rate for investment income.
- Tax-Equivalent Yield
- The pre-tax yield a taxable bond needs to equal the tax-free bond's after-tax return.
- Tax-Free Rate
- The tax-free bond's yield, restated for comparison against taxable options.
- Municipal Bond
- Debt issued by a state or local government whose interest is usually exempt from federal (and sometimes state) tax.
- After-Tax Yield
- A taxable bond's yield multiplied by (1 − tax rate): what you actually keep after taxes.
- Combined Marginal Rate
- Your federal plus state marginal tax rates, used together when a muni is exempt from both.
Tax-Equivalent Yield Calculator FAQs
How is taxable-equivalent yield calculated?+
Tax-free yield ÷ (1 − combined marginal tax rate). A 3.5% muni yield at a 24% rate equals a 4.61% taxable-equivalent yield.
When are municipal bonds worth it?+
They tend to favor higher tax brackets, where the value of tax-free income is greatest. Lower brackets may do better with higher-yielding taxable bonds.