Taxable versus tax-exempt yield scenario
Municipal bond taxable-equivalent yield comparison
Compare an entered municipal bond yield with its modeled taxable-equivalent yield and a taxable alternative under your entered marginal tax rate.
Compare a municipal yield you believe applies to your tax situation with a taxable yield and a combined marginal tax-rate assumption you enter. The comparison is a simplified annual scenario, not a bond valuation or tax determination.
Enter the yields, tax-rate assumption, and amount to see the modeled comparison.
Formula and example
The simplified taxable-equivalent yield is ym ÷ (1 − t), where ym is the entered municipal yield and t is the entered marginal tax rate, both expressed as decimals. The taxable alternative's modeled after-tax yield is its entered yield × (1 − t). Annual income estimates multiply each yield by the entered amount.
Example: at a 3.50% entered municipal yield and 32% tax-rate assumption, the modeled taxable-equivalent yield is 5.15% (3.50% ÷ 0.68). On $100,000, that municipal yield represents $3,500 of annual interest in this simplified illustration. A taxable yield of 5.00% leaves $3,400 after applying the entered 32% rate. These are calculations from the example inputs, not current market rates or a recommendation.
The IRS explains that most interest is taxable but some interest may be tax-exempt, and that certain state and local government bond interest is not taxable at the federal level. The SEC notes municipal interest is generally exempt from federal income tax and may also be exempt from state and local taxes for residents of the issuing state; it also identifies alternative minimum tax and investment risks to consider. Sources checked November 3, 2026: IRS Topic 403: Interest received and SEC Investor Bulletin: Municipal Bonds.
This comparison assumes the municipal yield entered is tax-exempt at the selected rate and applies one combined marginal rate to the taxable alternative. It does not calculate federal, state, local, or alternative minimum tax; state-tax deductions; tax on a particular security; fees; compounding; price changes; or taxable-equivalent yield under bond-specific terms. Municipal bonds can have credit, call, interest-rate, liquidity, and inflation risks. Verify tax treatment and compare official statements, costs, maturity, and risks before making an investment decision. This is educational information, not tax, investment, or financial advice.
Related tools
For a general fixed-rate interest illustration, see the simple and compound interest calculator. For recurring contributions and a user-entered return assumption, use the compound savings planner.
How it works
Enter the quoted municipal yield, a taxable alternative yield, your combined marginal tax-rate assumption, and an amount to compare modeled annual income and taxable-equivalent yield.
Good to know
What does taxable-equivalent yield mean?
It is the taxable yield that would leave the same modeled after-tax income as the entered tax-exempt yield at your entered marginal tax rate. The formula is municipal yield divided by one minus the rate.
Does this determine how a particular municipal bond is taxed?
No. Tax treatment depends on the bond, your location, and your circumstances. Some municipal interest may be subject to federal tax or the alternative minimum tax, and state or local treatment varies. Confirm the security's official statement and ask a tax professional about your situation.
Does the comparison include investment risk or fees?
No. It compares entered yields after a simplified tax adjustment. It does not model credit, call, interest-rate, liquidity or inflation risk, fees, price changes, or reinvestment. Review the bond's disclosures and risks separately.
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