A municipal bond paying 4% tax-free can beat a corporate bond paying 5.5% once the IRS takes its cut. This calculator converts a tax-free yield into the taxable yield you would need to match it — and shows the break-even point across every federal bracket.
Example 1 — The classic muni advantage. A high-grade municipal bond yields 4.0% tax-free. You are in the 35% federal bracket for 2025. A corporate bond must pay 4.0 / (1 − 0.35) = 6.15% to leave you with the same 4.0% after tax. If the best corporate bond you can find pays 5.5%, the muni wins by roughly 0.53 percentage points of after-tax yield.
Example 2 — The 22% bracket flips the answer. The same 4.0% muni in the 22% bracket only needs a taxable yield of 4.0 / (1 − 0.22) = 5.13% to break even. A 5.5% corporate bond now beats it: 5.5 × (1 − 0.22) = 4.29% after tax, which is better than 4.0% tax-free.
Example 3 — Adding the 3.8% NIIT. If your income also triggers the Net Investment Income Tax, your effective rate on bond interest is 35% + 3.8% = 38.8%. The 4.0% muni now requires a taxable yield of 4.0 / (1 − 0.388) = 6.54%, making the tax-free bond even more attractive.
Example 4 — Same-state munis are triple tax-free. If you buy a municipal bond issued by your own state, the interest is typically exempt from federal, state, and local tax. That raises your effective exemption rate above the federal bracket alone and raises the taxable equivalent yield you would need from a corporate bond.
A 4.0% tax-free municipal bond versus a 5.5% taxable bond, across the 2025 federal brackets:
| Federal Bracket | Muni 4.0% after tax | Taxable 5.5% after tax | Break-even taxable yield | Winner |
|---|---|---|---|---|
| 12% | 4.00% | 4.84% | 4.55% | Taxable |
| 22% | 4.00% | 4.29% | 5.13% | Taxable |
| 24% | 4.00% | 4.18% | 5.26% | Taxable |
| 32% | 4.00% | 3.74% | 5.88% | Muni |
| 35% | 4.00% | 3.58% | 6.15% | Muni |
| 37% | 4.00% | 3.47% | 6.35% | Muni |
The crossover sits between the 24% and 32% brackets. That is why municipal bonds are marketed almost exclusively to high earners — below the crossover a taxable bond usually wins.
The formula needs your marginal bracket (the top rate you pay). Using an 18% effective rate instead of a 24% marginal rate understates the muni's advantage.
If you live in a high-tax state and buy an out-of-state muni, that interest is usually state-taxable. Add your state rate to the federal rate for an accurate TEY.
Above the $200k/$250k thresholds, the 3.8% Net Investment Income Tax applies to taxable bond interest but not to municipal interest.
A 6.5% taxable yield often means a low-rated issuer. Compare against a similar-credit muni, otherwise you are paid for risk, not for tax.
Municipal bonds are issued by states, cities, counties, and their agencies to fund roads, schools, hospitals, and water systems. Because Congress wanted to lower the borrowing cost for local governments, it made the interest on most municipal bonds exempt from federal income tax under IRC §103. If you buy a bond issued in your own state, the interest is usually exempt from state and local tax too — the so-called "triple tax-free" treatment.
That exemption is not free. Munis generally carry lower stated yields than corporate bonds of similar maturity precisely because the buyer is being compensated with tax savings instead of coupon. The taxable equivalent yield calculation is the only clean way to compare the two, because a 4% tax-free coupon and a 5.5% taxable coupon are not the same number once the IRS is involved.
This tool matters most to investors in the top two federal brackets (32% and 37%), anyone subject to the 3.8% Net Investment Income Tax, residents of high-tax states such as California, New York, and New Jersey, and retirees holding bonds in a taxable brokerage account rather than an IRA. If you are in the 10% or 12% bracket, municipal bonds rarely beat a comparable taxable bond or a Treasury of the same maturity, and this calculator will show you that quickly.
Municipal yields are tracked by indices such as the Bloomberg Municipal Bond Index and quoted daily on broker bond screens. Investment-grade corporate yields are tracked against Treasury benchmarks — typically quoted as a spread over the comparable Treasury note. In recent markets, 10-year AAA municipal yields have ranged roughly 2.8%–3.6% while 10-year investment-grade corporates have offered around 5.0%–6.0%. The relationship between those two numbers, adjusted for your bracket, is exactly what this calculator computes.
A taxable equivalent yield comparison only makes sense between bonds of similar credit quality and duration. Municípios are not risk-free — Detroit's 2013 bankruptcy and Puerto Rico's debt restructuring both imposed real losses on bondholders. Compare a AAA general-obligation muni against a AA-rated corporate bond, not against a CCC high-yield issue, or you are comparing compensation for tax against compensation for default risk.
| Investment | Typical Recent Yield | Federal Tax | State Tax | Best For |
|---|---|---|---|---|
| In-state municipal bond | 2.8% – 3.6% | Exempt | Exempt | Top brackets in high-tax states |
| Out-of-state municipal bond | 2.8% – 3.6% | Exempt | Taxable | Diversified muni exposure |
| Corporate bond (IG) | 5.0% – 6.0% | Taxable | Taxable | Low/mid brackets, IRAs |
| US Treasury note | 4.0% – 4.6% | Taxable | Exempt | Safety, state-tax relief |
| High-yield corporate | 6.5% – 8.0% | Taxable | Taxable | Risk-tolerant, tax-sheltered accounts |
Yields shown are illustrative recent-market ranges for a 10-year maturity and change daily. Always use live quotes from your broker when making a decision.
⚠️ Important Note: This calculator provides an educational estimate of taxable equivalent yield based on the tax rate you enter. It does not account for alternative minimum tax (AMT) on private-activity bonds, de minimis market discount rules, capital gains on secondary-market purchases, or state-specific exemption rules. Municipal bond interest can trigger AMT in some cases. This is not tax or investment advice — consult a licensed tax professional and a financial advisor before investing.
Taxable equivalent yield (TEY) is the yield a taxable bond would need to pay to match the after-tax return of a tax-free municipal bond. It equals the tax-free yield divided by one minus your marginal tax rate, and it lets you compare taxable and tax-exempt investments on equal footing.
Municipal bonds pay less because their interest is exempt from federal income tax and often state and local tax too. Investors accept the lower coupon in exchange for the tax savings, so issuers can borrow more cheaply than they could with taxable debt.
Municipal bonds generally win for investors in the 32%, 35%, and 37% federal brackets, and for anyone paying the 3.8% Net Investment Income Tax. In the 10%, 12%, and often the 22% and 24% brackets, a comparable taxable bond or Treasury usually produces a higher after-tax return.
Include state tax only if the municipal bond you are comparing is from out of state, because out-of-state muni interest is normally taxable by your home state. If you buy an in-state municipal bond, its interest is typically exempt from state tax as well, so your federal bracket alone is the correct rate.
Most municipal bond interest is exempt from federal income tax under IRC Section 103, and in-state issues are usually exempt from state tax too. However, interest on private-activity bonds can be subject to the alternative minimum tax, and market discount on bonds bought below par in the secondary market can be taxed as ordinary income.
You can, but it is usually a mistake. An IRA already grows tax-deferred, so the municipal tax exemption adds no benefit inside the account. You would generally get a higher return holding a higher-yielding taxable bond in an IRA and keeping municipal bonds in your taxable brokerage account.