Tax-equivalent yield calculator
Enter the yields you've actually been offered and your own tax rates. This computes each instrument's after-tax yield directly, using the taxes that actually reach it, then ranks all four and solves the crossover yield and the marginal tax rate at which the ranking flips.
Worked example — At a 22% federal, 5% state rate, the winner is: Corporate bond, 3.723% after tax. Stated at 5.10%. Muni 3.40%, Treasury 4.30%, CD 4.55%, corporate 5.10% stated.
Middle bracket: A median dual-income household below the top brackets and below the net investment income tax threshold.
Advanced: gross-up benchmark 1
What the one-line formula gives
Tax-free yield divided by one minus the federal rate puts the municipal bond at 4.359%. Against the same benchmark this page has it at 4.658%, a gap of +30 bp. The formula ignores the state tax and the net investment income tax the taxable alternative pays.
State tax is what moves the ranking
With the state rate set to zero this list comes out in a different order, which is visible in the last column. Anyone comparing a Treasury with a CD in a high-tax state and looking only at the stated yields is reading the wrong ranking.
The sensitivity answer
The top two swap at a federal rate of 28.33% or a state rate of 11.33%, holding everything else where you set it. If your bracket is near that line, the decision is not worth agonising over.
Rates are yours to set. This page holds no tax table, makes no claim about any year's law, and does not work out anyone's bracket. It also does not model the state-tax deduction, the alternative minimum tax on private-activity municipal bonds, the market-discount rules, or the effect of municipal interest on how Social Security benefits are taxed.
Tax-equivalent yield formula and which taxes reach which instrument
Tax-equivalent yield is after-tax yield divided by one minus the total tax rate on the benchmark instrument. The part every one-line version of the formula skips is that the total rate is not the same for every instrument.
| Instrument | Federal | State and local | Net investment income tax |
|---|---|---|---|
| Municipal bond, in state | No | No | No |
| Municipal bond, out of state | No | Yes | No |
| Treasury | Yes | No | Yes |
| Bank CD | Yes | Yes | Yes |
| Corporate bond | Yes | Yes | Yes |
Are Treasury bonds exempt from state income tax?
Yes. Treasury interest is exempt from state and local income tax, but it is fully taxable at the federal level and it counts as net investment income. That state exemption is why a Treasury can out-yield a CD after tax even when the CD's stated rate is higher, in a high-tax state.
Is municipal bond interest always tax-free?
No. In-state municipal interest is typically free of federal, state, and net investment income tax. Out-of-state municipal interest is usually state-taxable, which the standard one-line formula silently ignores. Get that distinction wrong and the ranking, not just the number, can be wrong.
What JMM thinks
The standard formula assumes municipal interest escapes every tax and Treasury interest escapes none, and it is wrong for most people who use it. A reader in a high-tax state is routinely pointed at the wrong instrument by it. Compare after-tax yields, not grossed-up ones: unless you are in a high federal bracket, a municipal bond often loses to a Treasury of the same maturity once the state exemption is accounted for, which is the opposite of the advice the category gives by default.
What this does not model: every rate is a user input, this page holds no tax table and makes no claim about any year's law or anyone's bracket. It does not model the state-tax deduction, the alternative minimum tax on private-activity municipal bonds, market-discount rules, capital gains on a sale before maturity, or the effect of municipal interest on how Social Security is taxed. For the yields themselves, use the bond yield calculator or the Treasury bill yield calculator. This is general publishing, not personal tax advice.
The next question after this one
Real after-tax return calculatorCalculatorThe ranking is after tax but still nominal. This takes inflation out too, in the correct order.Open nextOther questions
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