Enter Values
Understanding Tax-Equivalent Yield
Tax-equivalent yield (TEY) converts a tax-exempt municipal bond yield into the pre-tax yield that a taxable bond would need to provide the same after-tax return.
Formula: TEY = Muni Yield / (1 - Combined Tax Rate)
Results
Tax-Equivalent Yield
--
Enter values to compare
Combined Tax Rate
--
Breakeven Tax Rate
--
After-Tax Taxable Yield
--
Muni Advantage
--
Calculation Breakdown
Model Assumptions
- Assumes in-state municipal bond (exempt from both federal and state tax)
- Assumes fully taxable comparator (corporate) or state-exempt (Treasury)
- NIIT of 3.8% applies to net investment income above threshold
- Does not account for Alternative Minimum Tax (AMT)
- Uses marginal tax rates on interest income
For educational purposes. Not tax or investment advice. Consult a tax professional.
Frequently Asked Questions
Tax-equivalent yield (TEY) converts a tax-exempt municipal bond yield into the pre-tax yield a taxable bond would need to provide the same after-tax return. It helps investors compare muni bonds to taxable alternatives on an equal basis.
TEY = Municipal Bond Yield / (1 - Your Combined Marginal Tax Rate). Your combined rate includes federal tax, state tax (if applicable), and NIIT (3.8% for high earners). The exact calculation depends on whether your state taxes are deductible.
Use your marginal tax rate on interest income, not your effective rate. This is the rate on your next dollar of income. Include federal and state rates. If comparing to Treasuries, omit state tax since Treasury interest is state-exempt.
No. Most general obligation and revenue bonds are federally tax-exempt, but some munis are taxable. Private activity bonds may trigger AMT. State tax exemption typically requires holding in-state bonds. Capital gains on sale remain taxable even when interest is exempt.
Municipal bond interest is exempt from the 3.8% NIIT. However, taxable bond interest is subject to NIIT for investors above the threshold ($200K single / $250K MFJ). This increases the tax advantage of munis for high earners.
Compare the muni yield to the after-tax yield of the taxable alternative. If the muni yield exceeds the after-tax taxable yield, buy the muni. The decision depends on your specific tax situation, the yields available, and your state of residence.
