Debt investing

Tax-Equivalent Yield Calculator

Convert a tax-free yield into the taxable yield you would need to earn the same return after tax.

  • Free
  • No sign-up
  • Updated for 2026

Yield & tax rate

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Enter the tax-free yield and tax rate to see the tax-equivalent yield.

Worked example

With these example inputs:

  • Tax-free yield3.5%
  • Tax rate32%

Tax-equivalent yield: 5.2%

  • Tax-free yield3.5%
  • Tax rate32.0%
  • Amount added on1.6%
  • As a share of the total32.0%
  • If the first figure were 10% higher5.7%

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Comparing a tax-free bond with a taxable one

A municipal bond paying 3.5% tax-free and a corporate bond paying 5% taxable cannot be compared on their coupons. The tax-equivalent yield converts the tax-free rate into the taxable rate that would leave the same money after tax — one number against another, at your own bracket.

The formula

tax-equivalent yield = tax-free yield / (1 − marginal tax rate)

Worked example: 3.5% tax-free, 32% bracket

  • Tax-equivalent yield: 3.5 / (1 − 0.32) = 5.15%
  • A taxable bond must pay more than 5.15% to beat the municipal one

The answer depends on the bracket

Marginal rateTax-equivalent yield of 3.5%Beats a taxable 5%?
12%3.98%No
22%4.49%No
24%4.61%No
32%5.15%Yes
35%5.38%Yes
37%5.56%Yes

The same municipal bond is a poor deal for someone in the 12% bracket and a good one at 32%. This is why municipal bonds sit almost entirely in high-bracket portfolios and why a retiree in a low bracket is usually better off in taxable bonds.

Which rate to use

The marginal rate, not the effective one — the tax on the next dollar, which is what the bond interest is. Add state income tax if the municipal bond is from your own state, since in-state munis are typically exempt from both; a 32% federal and 9.3% California filer should use about 41%, which lifts the equivalent yield to 5.93%. Out-of-state munis are usually taxed by your state.

High earners should also add the 3.8% net investment income tax that applies to taxable interest above $200,000 of income, but not to municipal interest.

What the yield does not capture

Credit risk and liquidity. Investment-grade munis default rarely, but the comparison should be like for like: a AA muni against a AA corporate. And the tax-free status can be lost if the bond finances private activity, or if it triggers the alternative minimum tax.

What this calculator leaves out

State tax, the NIIT, capital gains on bonds bought at a discount, and the fact that brackets change — a bond held twenty years crosses several.

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Frequently asked questions

How is tax-equivalent yield calculated?

Divide the tax-free yield by one minus your tax rate. A 3.5% municipal yield at a 32% tax rate is equivalent to a taxable yield of about 5.15%.

What does this figure decide?

It lets you compare tax-free bonds, like municipals, with taxable bonds on equal footing. The higher your tax rate, the more attractive tax-free yields become.

What is tax-equivalent yield in simple terms?

Tax-equivalent yield, or TEY, is the yield a taxable investment would need to pay so that, after tax, it matches a tax-free one. Some bonds, like many municipal bonds, pay interest that is free of tax, so a 3.5 percent tax-free yield can be worth more than a higher taxable yield once tax is taken out. TEY converts the tax-free rate into the taxable rate you would have to earn to come out even. This lets you compare the two on a fair, after-tax basis.

How does the tool work out the yield?

It divides the tax-free yield by one minus your tax rate, with the rate entered as a percentage. So a 3.5 percent tax-free yield at a 32 percent tax rate gives 3.5 divided by 0.68, which is about 5.15 percent. That means a taxable bond would need to yield 5.15 percent to match the tax-free 3.5 percent. The higher your tax rate, the higher the equivalent yield climbs.

What sits outside this calculation?

It uses a single tax rate, so it does not handle tax brackets, the difference between state and federal tax, the alternative minimum tax, or income phase-outs. It also assumes the yield is fully tax-free and the alternative is fully taxable, which is not always true. The tax rate must be below 100 percent for the math to work. So treat the result as a clean comparison, and check your real tax situation before deciding.