Municipal Bond Taxable-Equivalent Yield Calculator
Example: Municipal bond yield: 4 % · Federal marginal tax rate: 32 % · State income tax rate (0 if muni is in-state exempt): 0 % · Subject to Alternative Minimum Tax? (0 = No, 1 = Yes): 0
| Taxable-equivalent yield you need to match the muni | 5.88% |
| Your muni after-tax yield | 4.00% |
| A 5% taxable bond's after-tax yield at your rate | 3.40% |
| Muni advantage over a 5% taxable bond (after-tax) | 0.60% |
Worked example
A 4% muni yield for a filer in the 32% federal bracket (no state tax): taxable-equivalent yield = 4% ÷ (1 − 0.32) = 5.88%. That means a taxable bond must yield 5.88% before tax to match the muni's 4% after tax. A typical 5% corporate bond only yields 3.4% after 32% taxes — so the 4% muni wins by 0.6 percentage points annually, every year, compounding.
Frequently asked questions
Are all municipal bonds federal tax exempt?
Most are, but not all. Private activity bonds — issued to fund private projects like airports or stadiums — may be subject to AMT for some taxpayers. Treasury bonds and TIPS are exempt from state tax but not federal. Always check the specific bond's tax status in its prospectus.
At what tax bracket do munis start to make sense?
The break-even varies by the muni yield and available taxable alternatives. Generally, investors in the 24% bracket and above find in-state munis competitive. Those in the 32%, 35%, and 37% brackets gain the most from munis. Investors in lower brackets often do better with taxable bonds in tax-advantaged accounts.
Does state tax exemption matter much?
It can be significant. A state with a 10% income tax rate adds 10 percentage points to your combined rate, boosting the taxable-equivalent yield of an in-state muni considerably. Enter 0% for state rate if the muni is exempt in your state; enter your full state rate if it is a bond from another state.