California Tax-Equivalent Yield: Municipal Bonds, Treasuries After-Tax Calculator
California has the highest top income tax rate in the country, and that significantly impacts the after-tax return of every investment a California resident might hold for yield.
A Treasury bond that trails a CD on the offer sheet can beat it comfortably after tax. A California municipal bond paying less than a corporate bond can leave far more in your pocket. This page walks through why, in California’s own brackets, and the calculator below runs the numbers for your situation.
Take a California resident with $150,000 of taxable income, comparing a 4.30% CD to a 4.10% Treasury of similar maturity. The CD’s interest is taxed by both the IRS and California; at a 24% federal and 9.3% California rate that is 33.3% combined, leaving about 2.87% after tax. The Treasury’s interest is exempt from California tax, so only the 24% federal rate applies, leaving about 3.12%. The lower-yielding Treasury wins by a quarter point, and the reason is entirely California’s rate. In a no-income-tax state the two would tie.
California’s rate is the whole story
California taxes interest as ordinary income across nine brackets, from 1% up to 12.3%. Above $1 million of taxable income, a 1% Mental Health Services Tax stacks on top, bringing the top marginal rate to 13.3%. That surcharge threshold has not been adjusted for inflation since voters approved it in 2004, so a one-time event such as a stock sale or a large bonus, can push an otherwise ordinary year over the line. California also taxes capital gains as ordinary income, with no preferential rate, which matters for a point below.
Because interest stacks on top of your other income, the rate that applies to a new bond or CD is your marginal rate, not your average. The calculator estimates that California bracket from the taxable income you enter, and combines it with your federal bracket, the federal NIIT if you switch it on, and any local tax. What it does with California’s numbers is what a generic, federal-only calculator cannot do at all.
What a California municipal bond is really worth
A California municipal bond held by a California resident is usually exempt from both federal and California tax — double tax-free. That is the strongest position in the table, and its value climbs with your combined bracket. The table below shows the taxable yield a fully taxed investment would need to match a 4.0% double-exempt California municipal yield, by taxable income for a single filer.
| Taxable income | Federal | California | Combined | Equivalent taxable yield |
|---|---|---|---|---|
| $60,000 | 22% | 8% | 30% | 5.71% |
| $100,000 | 22% | 9.3% | 31.3% | 5.82% |
| $150,000 | 24% | 9.3% | 33.3% | 6.00% |
| $250,000 | 32% | 9.3% | 41.3% | 6.81% |
| $400,000 | 35% | 10.3% | 45.3% | 7.31% |
| $800,000 | 37% | 12.3% | 49.3% | 7.89% |
| $1,500,000 | 37% | 13.3% * | 50.3% | 8.05% |
* Includes the 1% Mental Health Services Tax on taxable income above $1 million. Add the 3.8% federal net investment income tax for high earners; it raises every figure further and applies to the taxable investment, not the municipal bond.
At $250,000 of income, a 4.0% California municipal bond does the work of a 6.81% taxable yield; at $800,000 it matches a taxable 7.89%, and adding the federal NIIT pushes that past 8.5%. This is why California municipal bonds are marketed almost exclusively to high-income Californians: the higher the combined rate, the more the double exemption is worth, and California’s rate is the highest there is.
The Treasury fund trap California residents keep hitting
A direct Treasury is exempt from California tax. A fund that holds Treasuries is a different matter, and California is stricter than most states about it. California, along with New York and Connecticut, only lets you exclude a fund’s government income if at least 50% of the fund’s assets sat in qualifying U.S. obligations at the end of every quarter. Clear the 50% bar and the qualifying share of the income is exempt. Miss it – even at 49%- and none of it is exempt in California, however much of the income actually came from Treasuries.
The out-of-state municipal bond most Californians miss
California exempts its own municipal interest but taxes interest on bonds issued by other states. A California resident who buys, say, a Texas municipal bond keeps the federal exemption but owes California tax on the interest, which quietly erases part of the reason to hold a municipal bond at all. Bonds from U.S. territories (Puerto Rico, Guam, the U.S. Virgin Islands), are the exception and are exempt in California as everywhere. The calculator keeps in-state and out-of-state municipal bonds as separate types for exactly this reason; do not model an out-of-state bond as a California one.
One more California wrinkle sits on the Treasury side. Because California taxes capital gains as ordinary income, selling a Treasury before maturity for more than you paid produces a gain that California taxes as income. The state exemption covers the interest, not the profit on an early sale. It rarely changes a buy-and-hold decision, but it is worth knowing before you count on the exemption.
One thing to set by hand in the calculator
The calculator estimates California rates from the state’s 2025 schedule, which California’s 2026 estimated-tax instructions point back to, and its top estimated bracket is 12.3%. It does not automatically add the 1% Mental Health Services Tax. If your taxable income is above $1 million, switch to “I know my rates” and enter 13.3% as your California rate so the surcharge is included. For every income below that line, the estimate already reflects the right bracket.
Frequently asked questions
Are Treasury bonds taxed in California?
Interest on direct U.S. Treasury bills, notes and bonds is exempt from California income tax, the same as in every state, under federal law. It is still fully taxed by the federal government. Because California’s own rate is one of the highest in the country, the state exemption on Treasury interest is worth more to a California resident than to almost anyone else.
Does California tax its own municipal bonds?
No. California exempts interest on bonds issued by California and its local governments from state income tax, so a California municipal bond held by a California resident is typically free of both federal and state tax. This is the opposite of Illinois, Iowa and Wisconsin, which tax their own municipal interest. California does tax interest on out-of-state municipal bonds.
What is California’s tax rate on investment interest in 2026?
California taxes interest as ordinary income across nine brackets from 1% to 12.3%, plus a 1% Mental Health Services Tax on taxable income above $1 million, for a top marginal rate of 13.3%. Which bracket your interest falls in depends on your total taxable income, because interest stacks on top of it. The calculator estimates your California bracket from the income you enter.
Do Treasury money market funds escape California tax?
Only if the fund passes California’s asset test. California, along with New York and Connecticut, exempts a fund’s government-obligation income only when at least 50% of the fund’s assets were in qualifying U.S. obligations at the end of every quarter. Meet the test and the qualifying share is exempt; miss it and none of the income is exempt in California, even if most of it came from Treasuries. Fund companies publish both figures each January.
Is a California municipal bond better than a Treasury for a California resident?
It depends on the yields and your bracket, which is exactly what the calculator compares. A California municipal bond escapes both federal and state tax; a Treasury escapes only state tax. At high combined rates the double exemption is powerful, but municipal bonds carry different credit and call risk, and Treasuries carry none of California’s, so the after-tax yield is only one input into the decision.
Does California have its own version of the 3.8% net investment income tax?
No. The 3.8% net investment income tax is federal. California does not levy a separate surtax on investment income, but a California resident with high income still owes the federal NIIT on taxable interest, on top of California’s own rate. The calculator’s NIIT switch models the federal tax; California’s rate is handled separately by your bracket.
The bottom line for California residents
California’s rate does not just make taxes higher; it changes which investment is ahead. The state exemption on Treasury interest and the double exemption on California municipal bonds are both worth more here than in any other state, and both can turn a lower headline yield into a higher return. None of that settles the decision on its own — credit quality, maturity, liquidity and call features still differ, and a Treasury carries none of a municipal bond’s issuer risk. Run your own California brackets in the calculator above, then weigh everything else.
For the full method and the other states, see the main tax-equivalent yield calculator. The site’s compound interest calculator covers what a rate does over time, and Begin To Invest Weekly sends one market moment from history against the week’s headlines every Sunday.
This article is for educational purposes only and is not investment, tax or legal advice. The calculator produces estimates based on assumptions you provide and does not account for every provision of federal or California tax law. Confirm any figure that affects a decision with a qualified tax professional. See our disclaimers.
