Tax-equivalent yield calculator

What is tax-equivalent yield?

The taxable yield you would need to match a tax-free yield after tax: tax-equivalent yield = tax-free yield ÷ (1 − your marginal tax rate).

Example

A municipal bond yielding 3.5% for someone in the 24% bracket: 3.5 ÷ (1 − 0.24) = 4.61%. A taxable bond must pay more than 4.61% to come out ahead.

Why does my tax bracket matter so much?

The higher your rate, the more tax you avoid. The same 3.5% is worth 3.98% in the 12% bracket and 5.56% in the 37% bracket.

Are municipal bonds always tax-free?

Not all — some municipal bonds pay taxable interest, so check the bond’s terms. State tax treatment also varies; this calculator uses the federal rate only.

Which rate should I use?

Your marginal (top) federal bracket — the rate on your last dollar of income, not your average rate. The income tax calculator shows it.

At what tax rate is a municipal bond better than a taxable bond?

Set the two after-tax yields equal: the break-even rate is 1 − (tax-free yield ÷ taxable yield). For a 3.5% municipal bond against a taxable bond paying 4.2%, that is 1 − 3.5 ÷ 4.2 = 16.7%. In a bracket above that, the municipal bond keeps more after tax; below it, the taxable bond does. At 12% the tax-equivalent yield is 3.98%, under 4.2%, and at 24% it is 4.61%, above it.

Is municipal bond interest reported on my tax return?

Yes. The IRS says interest on certain state, District of Columbia and territory bonds is not federally taxable, but you still report it on your return; reporting it does not make it taxable. Investor.gov adds that a bond may be subject to the federal alternative minimum tax.

How the calculation works

A taxable yield y becomes y × (1 − t) after a tax rate t. For a taxable bond to leave you the same as a tax-free yield, y × (1 − t) must equal that yield, so y = tax-free yield ÷ (1 − t). The calculator applies this with the federal bracket you choose, or any rate you enter under “Other rate.” It ignores state and local tax, even though investor.gov notes that municipal interest may also be exempt from those taxes for residents of the issuing state.

Worked example: 3.5% tax-free in the 24% bracket

1 − 0.24 = 0.76, and 3.5 ÷ 0.76 = 4.61%. A taxable bond has to pay more than 4.61% before tax to leave you better off than the municipal bond. The result depends heavily on the bracket: 3.98% at 12%, 4.61% at 24% and 5.56% at 37%.

Common mistakes

Using your average tax rate is the usual one; the right rate is the marginal bracket on the next dollar of income. Comparing bonds that differ in maturity, credit quality or call terms is another, because a yield gap may reflect risk rather than tax. Ignoring the alternative minimum tax and state tax rules for a particular bond is a third, since investor.gov says to check them with a tax professional. Holding a tax-exempt bond inside an IRA or 401(k) is a fourth: the interest is not taxed currently there anyway, so you accept a lower yield for a benefit you cannot use.

Sources: SEC Office of Investor Education and Advocacy, Municipal Bonds on investor.gov: interest is generally exempt from federal income tax, tax-exempt rates are usually lower than taxable rates on bonds of similar maturity and credit quality, and a bond may be subject to the alternative minimum tax; IRS, Topic no. 403, Interest received (reviewed October 7, 2026). The formula is the definition of the rate at which a taxable yield, after tax, equals the tax-free yield. See your bracket in the income tax calculator, compare bonds in the bond yield calculator and check the effect of inflation in the real return calculator.

Estimates for planning only — not financial or tax advice. Your lender, plan or tax professional decides. How we check our calculators.