Tax-Equivalent Yield Calculator

Tax-equivalent yield (TEY) is the pre-tax yield a taxable bond would need to deliver in order to match the after-tax income of a tax-free municipal bond at your marginal tax rate. The formula is muni yield divided by (1 minus your combined effective tax rate). For example, a 3.5% muni at a 32% federal bracket has a TEY of 3.5% / (1 - 0.32) = 5.15%. That means you would need a taxable corporate bond yielding more than 5.15% to beat the muni on after-tax income alone.

Interest on most state and local government bonds (general obligation, revenue, and similar) is exempt from federal income tax under Internal Revenue Code Section 103. The exemption dates to the 1913 federal income tax and rests on the principle that the federal government should not tax state and local borrowing costs. The exemption applies only to interest, not capital gains: if you sell a muni for more than you paid, the gain is taxed normally. Some categories are explicit exceptions to the federal exemption, including taxable munis like Build America Bonds, advance refunding bonds issued after 2017, and bonds that fail the IRS arbitrage rules.

Private-activity bonds (PABs) are munis that fund a substantially private project, like an airport, stadium, or hospital. The interest is still exempt from regular federal income tax, but it gets added back into your Alternative Minimum Tax (AMT) base. If AMT applies, you effectively pay the 26% or 28% AMT rate on that interest, wiping out most of the muni advantage. The 2017 Tax Cuts and Jobs Act and the Inflation Reduction Act narrowed AMT exposure for most filers, but it still bites high-income taxpayers with large PAB holdings, ISO exercises, or heavy SALT deductions. Check whether a bond is labeled AMT or non-AMT in the prospectus, and price AMT bonds at their after-AMT yield if your AMT calculation comes in higher than your regular tax.

In-state munis (issued by your home state or one of its localities) are typically exempt from both federal and your state's income tax, while out-of-state munis usually escape only federal tax. That double exemption matters most if you live in a high-tax state like California, New York, Hawaii, or Oregon, where state rates run 9% to 13%. The trade-off is concentration risk: loading your fixed-income allocation into a single state's credit ties your portfolio to one local economy and one set of pension liabilities. Many high-bracket investors split the difference with a national muni fund for diversification plus a smaller in-state allocation for the state tax shield. Seven states (Florida, Nevada, South Dakota, Tennessee, Texas, Washington, Wyoming) have no state income tax at all, so the in-state question is moot for residents.

Treasuries are exempt from state and local tax but fully taxable at the federal level, while munis are usually the opposite. The breakeven is your federal bracket: if your federal marginal rate is high enough that the muni's TEY exceeds the Treasury yield, the muni wins. A useful rule of thumb is that munis beat Treasuries for investors in the 24% federal bracket and above (2026: roughly $103,350 single, $206,700 joint taxable income), and the math gets more decisive in the 32%, 35%, and 37% brackets. For investors below the 22% bracket, Treasuries usually win because the federal tax shield is too small to outweigh the muni's typically lower coupon and slightly higher default risk. Add a high state tax rate, and the in-state muni breakeven moves a bracket or two lower.