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Tax Equivalent Yield Calculator

📅Last updated: October 11, 2025
✓Reviewed by: LumoCalculator Team

Compute tax equivalent yield (TEY) to compare municipal bonds with taxable bonds. Enter tax‑free yield, optional taxable yield, federal/state rates and NIIT to see TEY, tax‑free equivalent and effective combined tax rate.

Tax Equivalent Yield

Tax-free bond yield (%)
Taxable bond yield (%) (optional)
Your marginal tax rates (%)

Your Results

TEY (Tax Equivalent Yield)
4.4118%
Tax-free Equivalent of Taxable
3.06%
Effective Combined Tax Rate
32%

TEY of 3.00% muni at 32% federal = 4.4118%

How we combine rates

effective = federal + state × (1 − federal)

Categories (Use Cases)

High Federal Tax Bracket
Muni bonds often outperform after-tax vs taxable bonds
In-state Munis
May be exempt from both federal and state taxes
Subject to NIIT
Include 3.8% NIIT when comparing yields
State-taxable Munis
If muni interest is taxed by your state, TEY will be higher

How to Calculate TEY

Formulas

Tax Equivalent Yield: TEY = Tax-free yield ÷ (1 − Effective tax rate)
Tax-free Equivalent: Tax-free = Taxable yield × (1 − Effective tax rate)

Steps

  1. 1
    Enter muni yield and your tax rates
    Federal, state (if applicable), optional NIIT
  2. 2
    Get effective combined tax rate
    We combine rates with interaction effects
  3. 3
    Compare TEY with taxable yield
    Or convert taxable yield to tax-free equivalent

Tips

Use marginal, not average tax rate
TEY comparisons should reflect your marginal bracket
Match credit quality and duration
Compare similar risk/term bonds when using TEY
Check AMT status
Private-activity munis may be AMT-subject and reduce advantage
Revisit when bracket changes
Tax law or income changes can shift TEY conclusions

Important Considerations

State Tax Treatment

Some munis are federally tax-free but taxable at state level. In-state general obligation bonds may be state-exempt.

NIIT 3.8%

High-income investors may owe NIIT; include it for accurate TEY.

AMT Exposure

Some private-activity munis may be subject to AMT; TEY does not include AMT adjustments.

Assumptions

TEY is a simplified comparison; actual after-tax returns depend on holding period, capital gains and specific state rules.

Example Cases

Case 1: Federal-only tax, muni 3.0%

Federal 32%, state 0% → TEY = 3.0% ÷ (1 − 0.32) = 4.41%

Case 2: Federal 32% + State 5% + NIIT

Effective rate ≈ 37.3% → TEY(3.0%) ≈ 4.79%

Frequently Asked Questions

What is Tax Equivalent Yield (TEY)?
TEY converts a tax-free bond's yield into the equivalent taxable yield so you can fairly compare muni bonds with taxable bonds.
How do you calculate TEY?
TEY = Tax-free yield ÷ (1 − Effective combined tax rate). Effective tax rate may include federal, state and NIIT depending on your situation.
Do state taxes matter?
Yes. If your muni bond is not exempt from your state taxes, add your state marginal tax rate. Some states offer exemptions; adjust accordingly.
What about the 3.8% NIIT?
If you are subject to NIIT, you can include 3.8% in the effective rate to get a more accurate comparison.

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