A tax equivalent yield calculator helps you compare apples to apples when choosing between tax-exempt and taxable investments.
Tax Equivalent Yield
Compare tax-exempt investments against taxable returns
What is a Tax Equivalent Yield Calculator?
A tax equivalent yield calculator helps you compare apples to apples when choosing between tax-exempt and taxable investments. Municipal bonds don’t get taxed by the federal government, while corporate bonds, CDs, and most other fixed-income investments do. A 3% tax-free return might actually beat a 4.5% taxable return depending on your tax bracket, but doing the math in your head is tricky.
This Tax Equivalent Yield Calculator does the conversion instantly. Pick which direction you need—starting with a tax-exempt yield and finding the taxable equivalent, or vice versa—enter your numbers and tax bracket, and see which investment actually puts more money in your pocket after tax cut.
The tool matters because your tax bracket dramatically changes what investments make sense. Someone in the 12% bracket might do better with taxable bonds, while someone in the 35% bracket often comes out ahead with municipal bonds paying lower headline rates. Without running the numbers, you’re guessing.
What Information You Need
Calculation Mode – Choose which direction you’re calculating. “Find Taxable Equivalent” works when you’re looking at a municipal bond and want to know what taxable yield would match it. “Find Exempt Equivalent” does the opposite—you’ve got a taxable investment and want to know what tax-free rate would give you the same after-tax return.
Tax-Exempt Yield – The interest rate on municipal bonds or other tax-advantaged investments. These yields look lower than taxable alternatives because they’re quoted before considering the tax benefit. A 3.5% muni bond might not sound exciting until you calculate what taxable rate you’d need to match it after paying taxes.
Taxable Yield – The interest rate on corporate bonds, CDs, Treasury bonds, or other investments where you’ll owe federal income tax on the interest. This is the gross rate before taxes are deducted.
Marginal Tax Rate – Your top federal income tax bracket, not your overall average tax rate. If you’re in the 24% bracket, that’s what matters here. This is the percentage the government takes from your next dollar of income, which is exactly what they’ll take from your investment interest.
How the Conversion Works
The math behind tax equivalent yield is straightforward but critical for smart investing decisions.
Finding Taxable Equivalent Yield
When you own a tax-exempt bond, this formula shows what taxable yield would give you the same after-tax return:
Taxable Equivalent = Tax-Exempt Yield ÷ (1 − Tax Rate)
For example, a 4% municipal bond for someone in the 32% tax bracket: 4% ÷ (1 − 0.32) = 4% ÷ 0.68 = 5.88%
You’d need a 5.88% taxable investment to match that 4% muni bond’s after-tax return. Suddenly that “low” 4% municipal yield looks pretty competitive.
Finding Tax-Exempt Equivalent Yield
When you’re looking at a taxable investment and wondering what tax-free rate would match it:
Tax-Exempt Equivalent = Taxable Yield × (1 − Tax Rate)
A 5% corporate bond for someone in the 24% tax bracket: 5% × (1 − 0.24) = 5% × 0.76 = 3.8%
After taxes, that 5% bond only delivers 3.8%. A 3.8% municipal bond would give you the same money in your pocket with less complexity.
What Your Results Tell You
Main Result – The equivalent yield in the other category. This is your decision-making number. If you’re comparing a 3.2% muni bond to a 4.8% corporate bond and the calculator shows you need 5.1% taxable to match the muni, the muni wins. If it shows 4.3%, the corporate bond is better.
Input Yield – Just displays back what you entered, so you can quickly verify you’re looking at the right comparison.
Effective Tax Loss – The percentage points you lose to taxes. This isn’t money you lose from your principal—it’s the gap between the gross yield and what you actually keep. On a 5% taxable bond in the 32% bracket, you lose 1.6 percentage points to taxes, keeping only 3.4%. Seeing this number makes the tax impact concrete.
Yield Comparison Chart – Two bars showing gross yield versus after-tax yield. When comparing taxable investments, the difference between these bars shows what taxes cost you. For tax-exempt investments, the bars stay equal because there’s no tax bite. This visual makes it obvious why higher tax brackets benefit more from tax-exempt investments—their tax loss bar would be massive on taxable bonds.
Why This Matters More in Higher Tax Brackets
The tax equivalent calculation explains why municipal bonds become more alluring as your income increases. A person in the 12% tax rate loses 12 cents on every dollar. A person in the 37% range loses 37 pennies. The tax impact is more than tripled.
A 3% muni bond is equivalent to a 3.41% taxable bond for a person in the 12% rate, making munis hardly worthwhile. That same 3% muni is equivalent to a 4.76% taxable bond for those in the 37% rate, which is a significant benefit that is difficult to match with safe taxable options.
This is why financial advice about municipal bonds always includes “especially if you’re in a high tax bracket.” The math literally works better the more you earn.
Smart Investment Decisions
Use this calculator before buying any bond or fixed-income investment. Take a look at your available options; perhaps you are considering a 5.2% AA-rated corporate bond and a 3.8% AAA-rated municipal bond. Enter your tax bracket to determine which one yields a higher after-tax return. Often, the answer surprises many people.
Remember this only covers federal taxes. Some states tax muni bonds from other states but not their own. If you’re in California’s 9.3% top bracket and looking at California munis, your combined tax benefit could push the equivalent taxable yield even higher. Conservative investors in high-tax states often find their best risk-adjusted returns come from home-state municipal bonds.
The calculator also helps with rebalancing decisions. Maybe you bought municipal bonds years ago when you were in the 32% bracket. You’ve since retired and dropped to the 22% bracket. Run the numbers again—you might now do better selling those munis and switching to taxable bonds with higher gross yields.
Fixed-income investing looks boring until you realize that small percentage differences compound into thousands of dollars over years of holding bonds. This calculator ensures you’re picking the investment that maximizes what you actually keep, not just what sounds highest before taxes take their bite.