Tax Equivalent Yield Calculator
Compare municipal and taxable bond yield efficiency using tax-equivalent yield logic. Enter federal, state, and optional NIIT assumptions to estimate taxable-yield thresholds and after-tax return deltas before selecting fixed-income allocations.
Editorial & Review Information
Reviewed on: 2026-02-28
Published on: 2025-09-18
Author: LumoCalculator Editorial Team
What we checked: We re-checked TEY equation outputs, effective-tax-rate layering assumptions, and muni-vs-taxable comparison logic so threshold decisions remain internally consistent with the listed public references.
Purpose and scope: This calculator is an educational planning tool for fixed- income screening. It is not tax advice, legal advice, portfolio personalization, or a regulated securities recommendation.
How to use this review: Run base and stress tax scenarios (federal/state/NIIT), compare the break-even taxable yield against available bond options, then confirm final tax treatment with a qualified advisor.
Financial Disclaimer
Results are simplified estimates. Actual after-tax outcomes can vary with jurisdictional rules, AMT exposure, account type, realized holding period, coupon structure, and changes in your tax profile.
Use Scenarios
Muni vs corporate screening
Estimate whether a municipal bond yield is competitive relative to taxable corporate offers after accounting for your tax burden.
State-specific allocation review
Compare in-state and out-of-state assumptions to see whether additional state-tax advantages materially affect portfolio efficiency.
High-income planning with NIIT
Add NIIT assumptions for high-income households to test how incremental tax layers shift the break-even taxable yield.
Formula Explanation
Tax equivalent yield
TEY = Tax-free yield / (1 - effective tax rate)
TEY represents the taxable coupon required to match a municipal bond's tax-exempt income under your current tax assumptions.
Effective combined tax rate
Combined = 1 - (1 - federal) x (1 - state) x (1 - NIIT)
This calculator uses a layered effective-rate approximation and optional state-deductibility adjustment for planning scenarios.
Reverse comparison
Tax-free equivalent = Taxable yield x (1 - effective tax rate)
This output helps test whether a taxable coupon remains attractive after tax drag relative to muni alternatives.
Example Cases
Case 1: Federal-only comparison
Inputs: Tax-free muni yield 3.00%, taxable bond yield 4.50%, federal rate 32%, state rate 0%, NIIT off.
Computed results: Effective tax rate 32.00%, TEY 4.4118%, after-tax taxable yield 3.0600%, muni advantage -0.0600%.
Interpretation: The taxable input is 0.0882 percentage points above the 4.4118% break-even threshold, so taxable remains slightly stronger after tax in this setup.
Decision hint: If taxable spreads are narrow, run credit- and duration-matched alternatives; small coupon gaps can reverse the decision at this bracket.
Case 2: High-tax state scenario
Inputs: Tax-free muni yield 3.20%, taxable yield 5.10%, federal 37%, state 13.3%, NIIT on.
Computed results: Effective tax rate 47.45%, TEY 6.0900%, after-tax taxable yield 2.6798%, muni advantage +0.5202%.
Interpretation: With combined tax drag near 50%, a 5.10% taxable coupon sits about 0.99 points below TEY threshold, so muni income is materially more efficient.
Decision hint: In high-tax states, prioritize in-state muni screening first, then compare only against taxable issues that clear the TEY hurdle with similar risk.
Case 3: Mid-bracket review
Inputs: Tax-free muni yield 2.90%, taxable yield 4.40%, federal 24%, state 6.85%, NIIT off.
Computed results: Effective tax rate 29.21%, TEY 4.0964%, after-tax taxable yield 3.1149%, muni advantage -0.2149%.
Interpretation: The taxable input is 0.3036 points above TEY threshold, so taxable still leads on pure after-tax yield despite state-tax effects.
Decision hint: When TEY is close, use call features, liquidity, and credit dispersion as tie-breakers instead of coupon alone.
Boundary Conditions
Decision Workflow
- Collect candidate muni and taxable yields with similar duration and credit quality.
- Input your current federal, state, and NIIT assumptions based on expected filing profile.
- Check TEY threshold and after-tax taxable yield to identify efficient candidates.
- Stress-test tax assumptions and confirm whether conclusion remains stable.
- Finalize only after reviewing issuer risk, call terms, liquidity, and advisor guidance.
Sources & References
- Internal Revenue Service (IRS) - Publication 550 - Tax treatment reference for investment income categories and reporting context.
- U.S. SEC Investor.gov - Investor Bulletin - Investor education reference for bond-risk context and retail decision safeguards.
- Municipal Securities Rulemaking Board (MSRB) - Municipal market standards and investor-education authority context.
- FINRA Investor Resources - U.S. investor-protection and bond-risk education reference.