Tax Equivalent Yield Calculator

Tax Equivalent Yield (TEY) converts a tax-free municipal bond's yield into the equivalent yield you would need from a taxable bond to achieve the same after-tax return. FORMULA: TEY = Tax-Free Yield ÷ (1 - Marginal Tax Rate) For example, if you're in the 32% federal tax bracket and considering a 3% municipal bond, the TEY would be 3% ÷ (1 - 0.32) = 4.41%. This means a taxable bond would need to yield at least 4.41% to match the muni's after-tax return. TEY is essential for high-income investors comparing investment options across different tax treatments.

STEP-BY-STEP CALCULATION: 1. Determine your marginal tax rate (federal + state if applicable) 2. Subtract your tax rate from 1 (e.g., 1 - 0.32 = 0.68) 3. Divide the muni bond yield by this number EXAMPLE with Combined Rates: • Muni yield: 3.5% • Federal rate: 32% • State rate: 5% • Effective rate: ~35.4% (accounting for interaction) • TEY = 3.5% ÷ (1 - 0.354) = 5.42% This means a taxable bond must yield over 5.42% to beat the 3.5% muni bond for this investor.

MUNICIPAL BONDS (Munis): • Issued by state/local governments • Interest is typically exempt from federal taxes • May be exempt from state taxes if you buy in-state bonds • Generally lower yields than comparable taxable bonds • Best suited for high-income investors in high tax brackets TAXABLE BONDS (Corporate/Treasury): • Interest is fully taxable at your marginal rate • Higher stated yields to compensate for tax burden • More suitable for tax-advantaged accounts (IRA, 401k) • Wider variety of issuers and risk profiles The key is comparing after-tax yields, which is exactly what TEY helps you do.

YES, in most cases you should include state taxes for accurate comparison. WHEN TO INCLUDE STATE TAXES: • You live in a state with income tax • The muni bond is from OUT of your state (taxable at state level) • The taxable bond interest is subject to state tax WHEN STATE TAX IS ZERO: • You live in a no-income-tax state (FL, TX, NV, WA, etc.) • The muni is from your HOME state (often state-tax exempt) • Comparing Treasury bonds (exempt from state taxes) Including state taxes significantly increases TEY. For a California resident in the 37% federal / 13.3% state bracket, a 3% in-state muni has a TEY of approximately 6.4% when comparing to corporate bonds.

The NIIT is an additional 3.8% tax on investment income for high earners, including taxable bond interest. WHO PAYS NIIT: • Single filers with MAGI over $200,000 • Married filing jointly with MAGI over $250,000 HOW IT AFFECTS TEY: • Municipal bond interest is EXEMPT from NIIT • Taxable bond interest IS subject to NIIT • This adds 3.8% to your effective tax rate on taxable bonds EXAMPLE: • Federal: 37% + NIIT: 3.8% + State: 9% = ~46% effective rate • A 3% muni has TEY = 3% ÷ (1 - 0.46) = 5.56% For high-income investors, NIIT makes municipal bonds even more attractive compared to taxable alternatives.

FEDERAL TAX BRACKET IMPACT: | Tax Bracket | TEY of 3% Muni | Required Taxable Yield | |-------------|----------------|------------------------| | 10% | 3.33% | Low muni advantage | | 22% | 3.85% | Modest advantage | | 24% | 3.95% | Moderate advantage | | 32% | 4.41% | Strong advantage | | 35% | 4.62% | Very strong advantage | | 37% | 4.76% | Maximum advantage | KEY INSIGHT: Municipal bonds become increasingly attractive as your tax bracket rises. Investors in the 10-22% brackets often find taxable bonds more efficient, while those in 32%+ brackets typically benefit from munis.

Tax-Free Equivalent Yield is the REVERSE of TEY - it converts a taxable bond's yield to what you'd need from a tax-free bond to match it. FORMULA: Tax-Free Equivalent = Taxable Yield × (1 - Tax Rate) EXAMPLE: • Taxable bond yield: 5% • Your tax rate: 32% • Tax-Free Equivalent = 5% × (1 - 0.32) = 3.4% This tells you: A municipal bond yielding more than 3.4% would be a better deal than this 5% taxable bond. USE CASE: When shopping for muni bonds, calculate the tax-free equivalent of available taxable yields to set your minimum acceptable muni yield.

NO - not all municipal bonds offer full tax exemption. FULLY TAX-EXEMPT MUNIS: • General obligation bonds from your state • Essential service revenue bonds • Most public purpose municipal bonds POTENTIALLY TAXABLE MUNIS: • Private Activity Bonds (may be subject to AMT) • Taxable municipal bonds (explicitly taxable) • Out-of-state munis (state tax may apply) • Build America Bonds (federally taxable) AMT CONSIDERATION: If you're subject to Alternative Minimum Tax, some "tax-free" muni interest may become taxable. Private activity bonds are particularly susceptible to AMT treatment. Always check the bond's tax status in the prospectus before assuming full tax exemption.

CREDIT RATING MATTERS: Municipal bonds carry credit risk, and TEY alone doesn't account for this. You should compare: 1. YIELD SPREAD: Higher-rated munis yield less but are safer • AAA munis: 2.5-3.5% typical yields • A-rated munis: 3.5-4.5% typical yields • BBB munis: 4.5-5.5% typical yields 2. RISK-ADJUSTED COMPARISON: Compare munis to similarly-rated taxable bonds: • AAA muni vs AAA corporate • A-rated muni vs A-rated corporate 3. DEFAULT RISK: • Municipal bond default rates are historically very low (<0.1% for investment grade) • But higher yields usually mean higher risk RECOMMENDATION: Don't chase yield by buying lower-rated munis. Compare TEY only among similar credit quality bonds.

GENERALLY NO - it's usually inefficient to hold munis in tax-advantaged accounts. WHY NOT: • Retirement accounts already provide tax deferral • Muni bond tax benefits are WASTED in these accounts • You're accepting lower yields for no additional benefit • Distributions will be taxed as ordinary income anyway BETTER STRATEGY: • Hold taxable bonds in IRA/401k (tax-deferred) • Hold municipal bonds in taxable brokerage accounts (tax-free) • This maximizes overall tax efficiency EXCEPTION: If you've maxed out taxable account space and still want bond exposure, any bond in a retirement account is fine - you're not losing anything, just not optimizing.

TOP STRATEGIES FOR TAX-EFFICIENT MUNI INVESTING: 1. BUY IN-STATE BONDS (Double Tax Exemption) • Avoid both federal AND state taxes • Especially valuable in high-tax states (CA, NY, NJ) 2. LADDER MATURITIES • Spread bonds across 2-10 year maturities • Reduces interest rate risk • Provides regular reinvestment opportunities 3. AVOID AMT BONDS if subject to AMT • Check bond's AMT status before buying • Stick to essential purpose/GO bonds 4. MATCH DURATION TO GOALS • Short-term needs: 1-3 year munis • Intermediate: 5-7 year munis • Long-term: 10+ year munis (more rate risk) 5. CONSIDER MUNI BOND FUNDS for diversification • National funds: Broad diversification • State-specific funds: State tax benefits

INTEREST RATE ENVIRONMENT IMPACTS: RISING RATES: • Existing bond prices fall • New bonds offer higher yields • Consider shorter durations to reduce risk • TEY becomes more attractive as yields rise FALLING RATES: • Existing bond prices rise (capital gains) • New bonds offer lower yields • Consider longer durations to lock in rates • May need to accept lower yields CURRENT CONSIDERATIONS: • Compare muni yields to Treasury/corporate yields • Watch the muni-to-Treasury ratio (M/T ratio) - Ratio > 80% often signals good muni value - Ratio < 70% suggests munis may be expensive TIMING TIP: When rates rise significantly, re-evaluate your TEY calculations - the calculus can shift as both muni and taxable yields change.