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Tax-Equivalent Yield Calculator for Municipal Bonds

What does this come to under the current IRS rules?

Taxable yield needed to match a tax-exempt yield at your federal rate, with or without a state exemption, and a taxable bond comparison.

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  • Nothing stored or sent
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Your figures
Example figuresIllustrative only. Type over them with your own.
Tax-equivalent yield
4.93%
Taxable yield that matches the tax-exempt yield after tax
Combined tax rate used
29.00%
After-tax yield of the taxable bond
3.27%
Drawn to one scale
Tax-equivalent yield4.93%
Combined tax rate used29.00%
After-tax yield of the taxable bond3.27%
All results
MeasureResult
Tax-equivalent yield4.93%
Combined tax rate used29.00%
After-tax yield of the taxable bond3.27%
Better after taxTax-exempt bond
How this was worked out
Work shownrecomputed as you type
Federal only: TEY = tax-exempt yield / (1 - federal rate)
Federal and state exempt: TEY = tax-exempt yield / (1 - federal rate - state rate)
Taxable after-tax yield = taxable yield x (1 - rate)

Illustrative arithmetic on the figures you enter. Check the result against your firm's methodology before relying on it.

The formulas

  • Federal only: TEY = tax-exempt yield / (1 - federal rate)
  • Federal and state exempt: TEY = tax-exempt yield / (1 - federal rate - state rate)
  • Taxable after-tax yield = taxable yield x (1 - rate)

How it works

Interest on a bond issued by a state or local government is generally not taxable for federal income tax, per IRS Publication 550. If your state also exempts the interest, set the state switch to Yes. The tax-equivalent yield is the taxable yield you would need to earn the same after tax, so the two can be compared on one scale.

The higher your marginal rate, the more a tax exemption is worth. The formula adds federal and state rates. It does not model deducting state tax on the federal return, market discount rules, or the alternative minimum tax: IRS Publication 550 treats interest on qualified private activity bonds issued after August 7, 1986, as a tax preference item for the AMT.

Illustrative figures only. Check the result against your firm's methodology before relying on it.

Common questions

Which rate do I use?

Your marginal rate: the rate on the next dollar of income, not your average rate.

Is the comparison fair across credit quality?

Only for bonds of similar credit and maturity.

What about Treasury bonds?

Interest on Treasury bills, notes and bonds is subject to federal income tax and exempt from all state and local income taxes, per IRS Publication 550. That is the reverse case and needs its own formula.

Sources

Runs in your browser. The figures you type are not sent to CORAA or stored. Check the result against your firm's methodology before relying on it.

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