What is taxable-equivalent yield?
Taxable-equivalent yield (TEY) estimates the yield a taxable investment would need to match the after-tax yield of a tax-exempt municipal bond under a selected tax-rate assumption. The standard simplified formula is municipal tax-exempt yield divided by one minus the applicable marginal tax rate. This calculator compares entered scenarios; it does not identify your tax bracket or confirm that a particular bond is tax-exempt.
For example, if you enter a 3.5% municipal yield and a 24% effective marginal rate, the modeled TEY is about 4.61%: 3.5% ÷ (1 − 0.24). The comparison is most useful when the municipal and taxable yields relate to bonds with similar maturity and credit quality. Those are user-entered assumptions; the calculator does not fetch quotes or assess bond risk.
How should I choose the tax-rate assumption?
Enter an effective marginal rate that you believe applies to the taxable alternative. It may reflect federal tax only or a combined assumption you calculate separately. Do not simply add federal, state, and local rates without considering how your circumstances and applicable rules affect the combined rate. The calculator applies one rate uniformly; it does not account for deductions, surtaxes, phaseouts, progressive brackets, or whether state and local taxes apply to your particular income.
Does a municipal bond always have tax-exempt interest?
No. Federal treatment depends on the obligation and applicable rules. The IRS describes tax-exempt interest reporting and identifies amounts that may be subject to the alternative minimum tax (AMT). Certain private activity bond interest can affect AMT. State and local treatment also depends on the investor's residence, the issuer's location, the type of bond, and jurisdiction-specific law. Some states exclude interest on in-state obligations but tax out-of-state interest; rules and exceptions vary. Verify the official statement, tax documents, and current rules for the specific bond and your residence before treating its yield as fully exempt.
The calculator treats the municipal yield you enter as already tax-exempt for your scenario. If some of its interest is taxable to you or subject to AMT, this TEY output can overstate the comparison. It also omits bond premiums or discounts, accrued interest, capital gains, transaction costs, liquidity, calls, reinvestment, and changing yields. A higher TEY does not by itself establish that one bond is a better fit.
Sources checked 2026-11-03: IRS Publication 550 (2025), Investment Income and Expenses, including tax-exempt interest and AMT reporting; and Fidelity Investments, “Bonds, Bond Funds, and Bond ETFs” (February 5, 2026), which presents a Tax-Equivalent Yield Calculator and discusses residence and issuer location.
Frequently asked questions
Does TEY predict a bond's return?
No. It is a yield comparison under entered assumptions. It does not predict prices, total return, default, calls, liquidity, or future tax law.
Can I use my combined state and federal rates?
Use one effective rate that you determine applies to the taxable alternative. The tool cannot determine the interaction among federal, state, and local rules or deductions.
Does this account for AMT?
No. Some tax-exempt interest may be relevant to AMT. Check the bond's tax documents and IRS guidance for your situation.
Does state residency matter?
It can. Whether a state excludes interest may depend on where you live and where the issuer is located. The calculator does not determine state-specific treatment.