Tax Equivalent Yield Calculator

This tool calculates the tax-equivalent yield for taxable and tax-exempt investments. It helps savers, investors, and financial planners compare returns across different account types. Use it to evaluate municipal bonds, CDs, and other interest-bearing assets against your tax bracket.

💰 Tax Equivalent Yield Calculator

Calculate the taxable yield needed to match your tax-exempt investments

Yield of municipal bond, tax-free savings account, etc.

Your highest federal income tax bracket

Only include if investment is exempt from state tax

Enter to compare against your tax-exempt yield

How to Use This Tool

Follow these steps to calculate your tax-equivalent yield:

  1. Enter the yield of your tax-exempt investment (e.g., municipal bond yield) as a percentage.
  2. Input your federal marginal tax rate (the highest tax bracket you fall into for federal income tax).
  3. Add your state marginal tax rate if your tax-exempt investment is also exempt from state taxes (default is 0 if left blank).
  4. Select the type of tax-exempt investment you hold from the dropdown menu.
  5. Optionally enter the yield of a taxable investment (e.g., CD, corporate bond) you want to compare.
  6. Click the Calculate button to see your detailed results.
  7. Use the Reset button to clear all fields and start over, or Copy Results to save your breakdown.

Formula and Logic

The core formula for tax-equivalent yield (TEY) accounts for the taxes you would pay on a taxable investment, letting you compare it directly to a tax-exempt option:

TEY = Tax-Exempt Yield / (1 - Marginal Tax Rate)

Your marginal tax rate is the combined federal and state rate applied to your highest dollar of income. For example, if you have a 22% federal rate and 5% state rate, your combined marginal rate is 27%, so the denominator is 0.73.

We also calculate the after-tax yield of any taxable investment you enter, which is: Taxable Yield * (1 - Marginal Tax Rate). The difference between the TEY and your taxable yield shows how much more (or less) the taxable investment would need to yield to match your tax-exempt option.

Practical Notes

Keep these finance-specific tips in mind when using this calculator:

  • Marginal tax rates are tiered: use your highest applicable tax bracket, not your effective (average) tax rate. You can find current federal brackets on the IRS website.
  • State tax exemptions only apply to in-state municipal bonds in most cases. Out-of-state municipal bonds are usually subject to your state income tax.
  • Tax-exempt yields are typically lower than taxable yields for similar risk levels, but the after-tax value may be higher for high-income earners.
  • Compound interest and investment fees are not factored into this calculation. For long-term holdings, consider using a total return calculator that accounts for compounding.
  • Tax laws change frequently: always consult a certified financial planner or tax professional before making major investment decisions.

Why This Tool Is Useful

This calculator solves a common pain point for investors comparing taxable and tax-exempt options:

  • Savers can quickly see if a municipal bond's lower yield actually provides higher after-tax returns than a CD or corporate bond.
  • Financial planners can generate clear breakdowns to share with clients comparing investment options across account types.
  • High-income earners in high tax brackets can identify which investments maximize their after-tax income.
  • It eliminates manual math errors and provides a detailed breakdown you can save or share via copy-paste.

Frequently Asked Questions

What is a marginal tax rate?

Your marginal tax rate is the percentage of tax you pay on your last dollar of income. For example, if you are in the 22% federal tax bracket, every additional dollar you earn is taxed at 22%, even if your lower income is taxed at lower rates. This is the rate to use for TEY calculations, not your effective (average) tax rate.

Do I need to include state tax rates?

Only include state tax rates if your tax-exempt investment is exempt from state income tax. Most in-state municipal bonds are exempt from both federal and state taxes, while out-of-state municipal bonds are only exempt from federal taxes. If you are unsure, check the bond's prospectus or consult a tax professional.

Can I use this for retirement account investments?

No, this calculator is for taxable and tax-exempt non-retirement investments. Investments held in 401(k)s, IRAs, or other retirement accounts are tax-deferred or tax-free, so the tax-equivalent yield calculation does not apply. Use a retirement calculator for those account types.

Additional Guidance

For the most accurate results:

  • Verify your current marginal tax rates before entering values, as brackets adjust annually for inflation.
  • Compare investments with similar risk levels: municipal bonds are generally lower risk than corporate bonds, so a small yield difference may be offset by risk differences.
  • Re-calculate your TEY annually if your income changes and pushes you into a higher or lower tax bracket.
  • Remember that this tool provides estimates only, not tax or investment advice. Always confirm calculations with a financial professional before making investment decisions.