What Is a Tax Equivalent Yield Calculator?

A tax equivalent yield (TEY) calculator converts the yield of a tax-exempt municipal bond into the equivalent pre-tax yield that a taxable bond would need to offer to match it on an after-tax basis. This comparison is essential for fixed-income investors choosing between corporate bonds, Treasury bonds, and tax-free municipal bonds. Pre-filled with a 4.00% muni yield, 24% federal rate, and 5% state rate, the TEY is 5.63% — meaning you would need a taxable bond yielding at least 5.63% to beat the muni bond after taxes.

The Tax Equivalent Yield Formula

TEY = Municipal Bond Yield / (1 − Combined Marginal Tax Rate)

The combined marginal tax rate includes both federal and applicable state income taxes. For defaults: TEY = 4.00% / (1 − 0.29) = 4.00% / 0.71 = 5.63%. The bar chart compares TEY across all seven federal income tax brackets so you can see how the advantage changes with your tax situation.

When Does the Muni Bond Win?

The municipal bond wins when taxable alternatives yield less than the TEY. If you're in the 32% federal bracket with 5% state taxes and a 4% muni bond, your TEY = 4% / (1 − 0.37) = 6.35%. Any taxable bond yielding less than 6.35% is inferior on an after-tax basis for you. High-income investors in the 37% bracket benefit most dramatically from municipal bonds.

State Tax Exemption Bonus

Many states exempt municipal bonds issued within their borders from state income tax. For investors in high-tax states like California (13.3%), New York (10.9%), or New Jersey (10.75%), this can add enormous value. A California investor in the 37% federal bracket with 13.3% state tax on a 4% muni bond: TEY = 4% / (1 − 0.503) = 8.05% — remarkable advantage over taxable bonds.

AMT Considerations

Some municipal bonds — particularly private activity bonds (PABs) used to fund airports, toll roads, and private hospitals — may be subject to the federal Alternative Minimum Tax (AMT). These bonds typically offer higher yields to compensate. Always verify a muni bond's AMT status before assuming full tax exemption.

Municipal Bonds vs Treasury Bonds

Treasury bonds are exempt from state income taxes but taxable at the federal level. For investors in low-tax states, Treasuries may be more advantageous than municipal bonds. For high-state-tax investors, double tax-exempt (DTE) municipal bonds — exempt from both federal and state taxes — frequently outperform Treasuries on an after-tax basis despite their lower stated yields.

Credit Quality and Duration Risk

After confirming that a muni bond beats the TEY threshold, compare credit quality and duration risk. Municipal bonds range from AAA-rated state general obligation bonds to below-investment-grade revenue bonds. Higher yields often come with higher default risk. The muni bond default rate has historically been very low (well under 0.1% for investment-grade munis), but credit analysis remains essential.

Practical Examples

Conservative retiree (22% bracket, 5% state): TEY on 4% muni = 4% / 0.73 = 5.48%. At this bracket, competitive taxable bonds may beat the muni. High-income professional (37% bracket, 9.3% CA): TEY on 4% muni = 4% / (1 − 0.463) = 7.45%. Municipal bonds are clearly superior. The TEY analysis should always be the first step in fixed-income portfolio construction for high-income investors.