Tax Equivalent Yield
Compare muni bonds to taxable bonds
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Tax Equivalent Yield is built for comparing muni bonds to taxable bonds — fast, free, and private. Enter Municipal Bond Yield (%) and Your Tax Rate (%) in any order — Tax Equivalent Yield recalculates on every edit. Every Tax Equivalent Yield answer can be reproduced by hand. Tax Equivalent Yield shines when speed matters. You can disconnect once Tax Equivalent Yield has loaded; the arithmetic runs locally. Looking for tax equivalent yield calculator municipal bond or free online tax equivalent yield calculator? Tax Equivalent Yield covers both. Keep Tax Equivalent Yield bookmarked for next time. Tax Equivalent Yield is free, instant and local.
What the defaults give
A 3% municipal yield at a 24% tax rate is equivalent to 3.95% on a taxable bond.
So a taxable bond must yield at least 3.95% to leave you with the same after-tax income as the tax-free 3%.
The formula
Tax-equivalent yield = municipal yield ÷ (1 − tax rate)
0.03 ÷ (1 − 0.24) = 0.03 ÷ 0.76 = 3.95%.
Worked examples
3% at 24% → 3.95%
3% at 32% → 4.41%
3% at 37% → 4.76%
2.5% at 22% → 3.21%
4% at 24% → 5.26%
Why the gap widens with income
Every point of tax rate makes the tax-free yield more valuable. At 22% the equivalent is only 28% higher than the muni yield; at 37% it is 59% higher. This is why municipal bonds are bought mostly by investors in the upper brackets and rarely make sense in a low one — the tax advantage does not compensate for the lower headline yield.
What the comparison leaves out
- State and local tax. In-state munis may also escape state income tax, which the single-rate formula does not capture.
- The alternative minimum tax. Some private-activity munis are AMT bonds and lose part of the advantage.
- Credit risk. Muni and corporate bonds are not equally safe, so a straight yield comparison ignores what you are paid for.
- Liquidity and call features. A callable bond may be redeemed exactly when its yield is most valuable.
Use the figure as a first filter: if the taxable alternative is well above the equivalent yield, the tax advantage is not doing its job.
The comparison only works like for like. A municipal bond yielding 3% is worth 3.95% from a taxable bond at a 24% rate, but the calculation ignores state tax, which some states levy on out-of-state munis, and it assumes the taxable alternative carries the same credit risk and duration. For someone in the 12% bracket the equivalent yield is only 3.41%, so the muni advantage shrinks sharply as the tax rate falls.
Frequently Asked Questions
What does a 3.95% tax-equivalent yield mean?
That a taxable bond paying 3.95% leaves the same after-tax return as a 3% municipal bond for someone in the 24% bracket.
Why do high earners prefer municipal bonds?
Because the tax-free advantage grows with the rate. At 37% a 3% muni matches a 4.76% taxable yield, a gap few corporate bonds close.
Does this include state tax?
No, it uses a single combined rate. In-state munis often also escape state tax, which raises their true advantage.
What if I am in a low bracket?
The equivalent yield barely exceeds the muni yield, so a taxable bond of similar quality usually wins. The tax break is small by design.
Does the formula work for corporate bonds?
It works in either direction. To compare a taxable bond to a muni, divide the taxable yield by (1 − rate) or invert the formula.
Are municipal bonds risk-free?
No. They carry credit and interest-rate risk, and a higher headline yield can reflect weaker credit rather than a better deal.
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