Enter your tax-free yield, federal marginal tax bracket, and state marginal tax bracket to find the tax-equivalent yield — the taxable return you'd need to match a tax-exempt investment like a municipal bond. Adjust your brackets to see how higher taxes make tax-free bonds increasingly attractive compared to taxable alternatives.
Tax-Equivalent Yield
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Tax-Free Yield
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Combined Tax Rate
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Yield Advantage (Tax-Equiv. vs Tax-Free)
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Tax-equivalent yield is the pretax return a taxable investment must earn to match the after-tax return of a tax-exempt investment, such as a municipal bond. It allows investors to make an apples-to-apples comparison between taxable and tax-free options. The higher your combined tax rate, the higher the tax-equivalent yield will be.
The formula is: Tax-Equivalent Yield = Tax-Free Yield ÷ (1 − Combined Tax Rate). The combined tax rate accounts for both your federal and state marginal tax brackets, with the state tax deduction applied against the federal rate. This gives you the taxable yield you'd need to match what a tax-free investment provides.
Municipal bonds pay interest that is generally exempt from federal income tax and often state income tax too. Because investors receive the full yield without a tax haircut, issuers can offer lower nominal rates while still providing a competitive after-tax return — especially for investors in higher tax brackets.
Investors in higher marginal tax brackets benefit the most from tax-free investments. The tax-equivalent yield rises significantly as your combined federal and state tax rate increases, making municipal bonds and other tax-exempt securities more attractive relative to taxable alternatives for high-income earners.
Yes. This calculator assumes that state taxes paid are fully deductible on your federal return. The combined effective tax rate is therefore calculated as: Federal Rate + State Rate × (1 − Federal Rate). If state taxes are not deductible in your situation, add your state rate directly to the federal rate field instead.
Most municipal bonds are exempt from federal income tax, and bonds issued in your home state are often exempt from state and local taxes as well. However, some municipal bonds — particularly private activity bonds — may be subject to the Alternative Minimum Tax (AMT). Always verify the tax status of a specific bond before investing.
Yes. While municipal bonds are the most common example, any investment with a tax-free or tax-advantaged yield can be evaluated using this calculator. Simply enter the stated tax-free yield and your marginal tax rates to find the equivalent taxable return you would need to match it.
If you live in a state with no income tax — such as Florida, Texas, or Washington — simply enter 0% for the state marginal tax bracket. Your combined tax rate will equal only your federal marginal rate, which will lower the tax-equivalent yield compared to investors in high-tax states.