How do you know if a corporate bond fund is a better investment than a treasury bond, or a municipal bond?

The answer depends on your income, your federal and state tax rates, and your state’s tax laws. We have built this tax equivalent yield calculator to help you quickly determine which type of fixed income investment will provide you with the highest after-tax return.

A higher yield is not always a higher return. Once federal, state, local and the 3.8% net investment income tax are taken out, the investment with the biggest number on the offer sheet can quietly finish last. This calculator answers the question in your own tax brackets. It covers all 50 states, adds local income tax and the fund exemption rules most tools skip, and runs the comparison in either direction – from a taxable yield to its tax-free equivalent, or the reverse.

 

Tax Equivalent Yield Calculator

This calculator currently uses the 2026 Federal and state tax brackets. I can’t promise to keep up with the changes of all state tax brackets – So if you see that your state’s tax bracket is incorrect, please let us know.

What tax-equivalent yield actually measures

Say a bank is advertising a 4.50% CD and a Treasury of similar maturity yields 4.15%. For a hypothetical investor in the 32% federal bracket living in a state with a 9.3% top rate, the CD’s interest is taxed at both levels while the Treasury’s is exempt from state tax. The CD investor keeps about 2.64% after tax; the Treasury investor keeps about 2.82%. The lower headline yield is the higher take-home after taxes are taken into account. That reversal is the whole reason tax-equivalent yield exists, and it gets larger as tax rates rise.

Tax-equivalent yield answers a single question: what would a taxable investment have to yield to leave you as well off as a tax-free one? It exists because interest is taxed differently depending on what pays it. Bank and corporate interest is taxed at every level that applies to you. Treasury interest escapes state and local tax. Qualifying municipal bond interest escapes federal tax, and often state tax on bonds from your own state. Comparing the headline yields ignores all of that; comparing after-tax yields does not.

The arithmetic is short. After-tax yield is the stated yield multiplied by the share you keep: after-tax yield = yield × (1 − your marginal tax rate). To run it the other way — to find the taxable yield that matches a tax-free one — divide instead of multiply: required taxable yield = tax-free yield ÷ (1 − your marginal tax rate). A 3% fully tax-free yield, for someone whose applicable rate is 28%, is worth the same as a taxable 4.17% (that is 3% ÷ 0.72). The calculator uses the same two formulas; it just applies the right combination of federal, state, local and NIIT rates to each type of interest for you.

Why federal-only calculators get the answer wrong

Most tax-equivalent yield calculators online ask for two numbers: a tax-free yield and a federal tax rate. That was a reasonable simplification decades ago. It is not one now, for three reasons.

The first is state tax. For a resident of a high-tax state, the state rate can be a larger part of the story than any federal rounding, and it is the entire reason a Treasury beats a same-yield CD. A calculator that ignores state tax cannot show that gap at all. The second is that several of these tools still assume the state tax you pay comes back to you as a federal deduction, which lowers the effective cost of state tax. For most investors that assumption no longer holds. The state and local tax deduction was capped at $10,000 in 2018; it was raised to roughly $40,400 for 2026 under recent legislation but phases back down for higher earners and reverts to $10,000 later this decade. Because so many investors receive little or no federal benefit from their state tax, this calculator takes the conservative path: it adds the tax layers together and assumes no deduction offset. The third gap is that federal-only tools model neither local income tax nor the 3.8% net investment income tax, both of which can change which investment comes out ahead.

Treasuries, CDs and high-yield savings after tax

Direct U.S. Treasury interest is exempt from state and local income tax. Bank interest on savings, CDs, money market deposit accounts is taxed at every level. At the same headline yield, that difference alone decides the comparison, and it scales with your state rate. In a state with no income tax, a Treasury and a CD paying the same yield keep the same amount. In a high-tax state, the Treasury can pull well ahead.

Two traps hide inside this. The first is that the exemption belongs to the security, not to its wrapper. A Treasury bought directly, or through a fund that holds only Treasuries, carries the exemption; a broad bond fund that merely includes some Treasuries passes through only the U.S.-obligation share, and agency securities from issuers like the Federal Home Loan Banks are treated differently again. The second is that the exemption covers interest, not capital gains: sell a Treasury before maturity for more than you paid and the profit is an ordinary taxable gain at the state level, not exempt interest.

Municipal bonds: in-state, out-of-state, and the states that tax their own

Municipal bond interest is generally free of federal tax. Whether it is free of state tax depends on where the bond was issued relative to where you live. The usual pattern is that your own state exempts its bonds and taxes everyone else’s. So an in-state municipal bond is often free of both federal and state tax, while an out-of-state one is free of federal tax but taxed by your state.

The exceptions are where the money is. A few states tax the interest on their own municipal bonds: Illinois, Iowa and Wisconsin do so for most issues, and Oklahoma taxes many bonds sold before mid-2001. Some states apply reciprocity rules that hinge on how the issuing state treats their residents. Bonds from U.S. territories (Puerto Rico, Guam, the U.S. Virgin Islands) are exempt in every state. And a bond being labeled “municipal” does not by itself make it federally tax-free; taxable municipal bonds exist and should be compared as ordinary taxable bonds. Location is a strong default, not a guarantee, which is why the calculator lets you set the in-state and out-of-state exemption switches for the specific bond in front of you rather than assuming.

The 3.8% net investment income tax, and who it changes the answer for

The net investment income tax adds 3.8% on top of ordinary tax for higher earners, and it lands on taxable investment income, including interest from CDs, corporate bonds and Treasuries, once MAGI (modified adjusted gross income) passes $200,000 for a single filer or $250,000 for a joint filer. Qualifying municipal bond interest is excluded from it.

That exclusion can flip a close comparison. Consider a hypothetical investor in the 35% federal bracket, ignoring state tax, weighing a 3.00% municipal bond against a 4.70% Treasury. Without the NIIT, the Treasury keeps about 3.06% and edges out the muni’s 3.00%. Turn the 3.8% NIIT on, and since it hits the Treasury interest but not the muni bond, and the Treasury’s take-home drops to about 2.88%, so the lower-yielding muni now leaves more. Because the thresholds are fixed in statute and never indexed, the group of investors for whom this matters grows every year. The calculator’s NIIT switch is an assumption you turn on, not a full eligibility test; it applies the 3.8% to the taxable interest in the comparison so you can see the effect.

Local income tax: the layer nobody calculates

A handful of places levy income tax below the state level, and it can reach investment interest. New York City and Yonkers residents pay a city tax on the same interest New York State taxes. Every Maryland county and Baltimore City add a local income tax. A scattering of localities elsewhere do too. Treasury interest stays exempt from local tax along with state; municipal treatment varies. Almost no other tax-equivalent yield tool models this at all. The calculator asks for a local rate on investment interest specifically, and includes presets for New York City, Yonkers and the Maryland jurisdictions so you do not have to look the rate up.

2026 tax-equivalent yield table by federal bracket

The table below shows what a fully tax-free yield is worth as a taxable yield, by 2026 federal bracket, before any state or local tax. Read it as: to match the tax-free yield across the top, a fully taxable investment would need the yield in the cell. Your own state tax pushes every figure higher, which is what the calculator adds.

Federal bracket	3.0%	3.5%	4.0%	4.5%	5.0%
10%	3.33%	3.89%	4.44%	5.00%	5.56%
12%	3.41%	3.98%	4.55%	5.11%	5.68%
22%	3.85%	4.49%	5.13%	5.77%	6.41%
24%	3.95%	4.61%	5.26%	5.92%	6.58%
32%	4.41%	5.15%	5.88%	6.62%	7.35%
35%	4.62%	5.38%	6.15%	6.92%	7.69%
37%	4.76%	5.56%	6.35%	7.14%	7.94%

A single figure carries the lesson: at the top bracket, a 4% tax-free yield does the work of a taxable yield near 6.35%, before state tax is even counted. The higher your bracket, the more a tax exemption is worth – which is why municipal bonds are marketed to high earners and rarely to anyone else.

A short history of why these exemptions exist

The tax treatment this calculator models is not a law of nature. It is the residue of a century of argument about whether one government may tax another. In 1895, in Pollock v. Farmers’ Loan & Trust Co., the Supreme Court held that the federal government could not tax the interest on state and municipal bonds, treating it as an intrusion on state sovereignty. When the modern income tax arrived with the Sixteenth Amendment and the Revenue Act of 1913, the exemption for state and local bond interest was written in, and it has been a fixture of the tax code ever since.

The Treasury exemption from state tax runs the same logic in the other direction: states may not tax the instruments of the federal government, a principle old enough to trace back to McCulloch v. Maryland in 1819. The Tax Reform Act of 1986 complicated the municipal picture by carving out private-activity bonds and exposing some of them to the alternative minimum tax. Then, in South Carolina v. Baker, decided April 20, 1988, the Court removed the constitutional floor entirely: it held that the exemption for municipal bond interest is not required by the Constitution, and that Congress could tax that interest if it chose to.

That is the quiet fact under every number on this page. The exemptions that can make a 3.00% municipal bond worth more than a 4.70% Treasury to a high earner are policy choices, not constitutional guarantees. They have been narrowed before and could be narrowed again. The rules of the game are political creations, and they can change. Which is a reason to understand exactly what they are worth to you now, rather than to assume they are permanent.

What this calculator does not model

The comparison here is deliberately narrow, because a narrow calculation you can trust beats a broad one you cannot. It applies one marginal rate to a stream of interest. It does not handle income that crosses a bracket, the alternative minimum tax, deduction and credit phaseouts, the taxation of Social Security benefits, Medicare premium surcharges, the market discount or original-issue-discount rules on bonds bought at a discount, premium amortization, or the different treatment inside retirement accounts, trusts and corporate returns. It is built for a full-year U.S. resident individual holding interest-bearing investments in a taxable account. For anything close to a real decision, its output is a starting point for a conversation with a tax professional, not a substitute for one.

Frequently asked questions

Are Treasury bills taxed by state?

No. Interest on direct U.S. Treasury bills, notes and bonds is exempt from state and local income tax under federal law (31 U.S.C. §3124). It is still fully subject to federal income tax. The exemption is why a Treasury can leave more after tax than a bank CD paying the same headline yield, and why the gap widens in high-tax states.

Do I pay state tax on out-of-state municipal bonds?

Usually yes. Most states exempt interest on their own municipal bonds but tax interest on bonds issued by other states. So a resident of one state who buys another state’s bond generally owes state tax on that interest, even though it stays free of federal tax. Bonds issued by U.S. territories such as Puerto Rico are an exception and are typically exempt in every state.

Does the 3.8% net investment income tax apply to municipal bonds?

No. Qualifying tax-exempt municipal bond interest is excluded from the net investment income tax. The 3.8% NIIT applies to taxable interest — from CDs, corporate bonds and Treasuries — once modified adjusted gross income passes $200,000 for single filers or $250,000 for joint filers. Those thresholds are set in statute and are not adjusted for inflation, so more households cross them each year.

Which states tax their own municipal bond interest?

A small number do. Illinois, Iowa and Wisconsin tax most of their own municipal bond interest, and Oklahoma taxes many issues sold before mid-2001. A few states use reciprocity rules that turn on whether the issuing state returns the favor. Because the pattern is not uniform, the calculator lets you switch the in-state and out-of-state exemptions on or off for the specific bond you are modeling.

Is a tax-equivalent yield the same as an after-tax yield?

They are two views of the same math. After-tax yield is what a taxable investment keeps once tax is taken out. Tax-equivalent yield runs the comparison the other way: it is the taxable yield a fully taxed investment would need in order to match a tax-free yield. The calculator shows both, and can start from either a taxable or a tax-exempt yield.

Should I use my marginal or my effective tax rate?

Use your marginal rate — the rate on your next dollar of income. Interest from a new investment stacks on top of the income you already have, so it is taxed at the top of your stack, not at your blended average. The calculator estimates the marginal rate from the taxable income you enter, and you can override it if you know your bracket.

Do Treasury money market funds get the state tax exemption?

Only in part, and only if you claim it. A fund passes through the state exemption in proportion to the share of its income that came from U.S. government obligations, which fund companies report each January. California, New York and Connecticut add a further rule: the fund must have held at least 50% of its assets in U.S. obligations at each quarter-end, or none of its income qualifies. The calculator’s fund category models this with the percentage you enter.

Is this calculator current for 2026?

It uses 2026 federal brackets and the state schedules listed in its sources panel, reviewed in September 2026. A handful of states are marked as using a provisional or prior-year schedule where a final 2026 table was not yet published. Tax rules change, and the calculator does not update itself, so treat its output as an estimate and confirm anything close to a decision with the primary source or a tax professional.

The bottom line

Tax is one input into an investment decision, not the decision. A higher after-tax yield does not make a bond safer, more liquid, or better suited to what you need the money for; credit quality, maturity, call features and deposit insurance still matter and still differ. What tax-equivalent yield does is strip away one specific illusion — that the biggest headline number is the best deal. Run your own brackets above, then compare the investments on everything else.

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, state or local tax law. Confirm any figure that affects a decision with a qualified tax professional. See our disclaimers.