What does the break-even rate mean?

The break-even rate is the marginal tax rate at which a tax-free yield and a given taxable yield produce the exact same after-tax return. Above that rate, the tax-free bond wins; below it, the taxable bond wins.

Tax-Equivalent Yield Calculator

Q: What is the formula for tax-equivalent yield?

Tax-equivalent yield equals the tax-free yield divided by (1 minus your combined marginal tax rate as a decimal).

Q: What is a municipal bond?

A municipal bond is debt issued by a state, city, or local government. Interest income from most municipal bonds is exempt from federal income tax, and often from state tax if you live in the issuing state.

Q: How do I include state taxes?

Enter your state marginal tax rate in the optional state tax field. The calculator adds it to your federal marginal rate to form a combined tax rate before computing the tax-equivalent yield.

3 min read 3 steps 7 terms 3 examples 6 FAQs TEY = tax-free yield / (1 - combined tax rate)

Municipal bonds usually pay a lower stated yield than taxable bonds, but their interest is exempt from federal (and often state) income tax.

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Walk-through

How to Use This Calculator

3 steps

Enter the tax-free yield

Type the stated yield of the tax-free municipal bond as a percent, for example 4 for a 4% yield.

Enter your marginal tax rate

Add your federal marginal tax bracket, and optionally a state marginal rate if the bond isn't exempt from state tax.

Read the tax-equivalent yield, then compare

The result updates instantly. Switch to Compare to weigh it against a specific taxable bond, or Break-Even Rate to find the tax rate where the two tie.

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Reference

Formula & Methodology

1 formula

Tax-equivalent yield

TEY = tax-free yield / (1 - combined tax rate)

Combined tax rate is your federal marginal rate plus any state marginal rate, expressed as a decimal. Dividing the tax-free yield by (1 - rate) grosses it up to the pre-tax yield a taxable bond would need to match it.

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YMYL

Trust, Methodology & Sources

Written by Calculover Editorial Team · Updated 2026-07-21 · 2 sources

Editorial accountability

Author: {{^authorProfileUrl}}Calculover Editorial Team{{/authorProfileUrl}} - Finance content review

Owner: Calculover Editorial Team - Finance content review

Last reviewed: 2026-07-21

Last verified: 2026-07-21

Methodology

Tax-equivalent yield is computed with the standard formula TEY = tax-free yield / (1 - combined marginal tax rate), where the combined rate is the user's federal marginal bracket plus an optional state marginal rate, per the federal tax exemption for most municipal bond interest under Internal Revenue Code Section 103.

Assumption: The tax-free yield entered is assumed to already be fully exempt from federal income tax, as is the case for most municipal bond interest under IRC Section 103.

Assumption: Combined tax rate is a simple sum of the federal marginal rate and any state marginal rate entered — it does not model state deductibility of federal tax, bracket phase-outs, the Alternative Minimum Tax, or the Net Investment Income Tax.

Limitations & guidance

This calculator does not account for the Alternative Minimum Tax, Net Investment Income Tax, or bond-specific factors such as call risk, credit quality, de minimis market discount rules, or original issue discount, all of which can change a municipal bond's real after-tax return.

Marginal tax rate should be your top federal bracket, not your effective (average) tax rate — using the wrong one will overstate or understate the tax-equivalent yield.

Professional guidance: This calculator is for educational purposes only and is not financial, legal, or tax advice. Consult a licensed tax professional or financial advisor before making investment decisions based on tax-equivalent yield.

Primary sources

26 U.S. Code Section 103 — Interest on State and Local Bonds

IRS Publication 550, Investment Income and Expenses

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Glossary

Key Terms Explained

7 terms

Tax-equivalent yield The yield a taxable investment would need to earn to match a tax-free investment's return after taxes, given a specific marginal tax rate.

Municipal bond A bond issued by a state, city, or local government. Interest is typically exempt from federal income tax, and from state tax if you live in the issuing state.

Tax-free Interest income that is not subject to federal (and sometimes state) income tax, unlike interest from most corporate bonds or bank accounts.

Marginal tax rate The tax rate applied to your last dollar of taxable income — the rate that determines how much of an additional dollar of investment income you keep.

Taxable equivalent The pre-tax yield on a taxable investment that would leave you with the same after-tax income as a given tax-free yield.

After-tax The return remaining once income tax has been subtracted from the pre-tax (stated) yield.

Break-even rate The marginal tax rate at which a tax-free yield and a specific taxable yield produce identical after-tax returns; above it the tax-free bond wins, below it the taxable bond wins.

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Scenarios

Real-World Examples

3 worked examples

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32% federal bracket

4% municipal bond, no state tax

Tax-free yield 4% Marginal tax rate 32%

4 / (1 - 0.32) = 5.88%. A taxable bond would need to yield 5.88% to match this municipal bond's after-tax return — anything less and the muni wins.

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In-state investor

4% municipal bond with a 5% state tax added

Tax-free yield 4% Federal + state rate 37%

Combined rate rises to 37%, so the tax-equivalent yield climbs to 4 / (1 - 0.37) = 6.35%. Adding state tax makes the municipal bond look even more attractive relative to a taxable alternative.

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Comparing two real bonds

4% muni vs. a 5.5% taxable bond

Tax-free yield 4% Taxable bond yield 5.5%

The break-even rate is 1 - (4 / 5.5) = 27.27%. Anyone in a tax bracket above 27.27% comes out ahead with the municipal bond; below that rate, the 5.5% taxable bond wins.

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Deep Dive

Understanding Tax-Equivalent Yield

3 chapters · 3 min read

Municipal bonds usually pay a lower stated yield than taxable bonds, but their interest is exempt from federal (and often state) income tax. Tax-equivalent yield puts the two on the same footing by converting the tax-free yield into the pre-tax yield a taxable bond would need to match it.

How the tax-equivalent yield calculator works

The calculator divides your tax-free yield by (1 minus your combined marginal tax rate). Combined tax rate is your federal marginal bracket plus, if you provide one, a state marginal rate. Dividing by (1 - rate) "grosses up" the tax-free number to the equivalent pre-tax yield, because that's the fraction of a taxable bond's yield you actually keep after tax.

Inputs and what they mean

Tax-free yield is the stated coupon or yield-to-maturity of the municipal bond, entered as a percent. Marginal tax rate is your top federal income tax bracket — not your effective (average) rate, since the marginal rate is what applies to the next dollar of investment income. State tax rate is optional: include it if the bond isn't exempt from your state's income tax, which raises the combined rate and therefore the tax-equivalent yield. On the Compare tab, enter a specific taxable bond's yield to see a side-by-side verdict; the same taxable yield feeds the Break-Even Rate tab.

Limits and edge cases

This calculator uses a simplified combined-rate model (federal marginal rate plus state marginal rate) and does not account for the Alternative Minimum Tax, Net Investment Income Tax, state tax deductibility of federal tax, phase-outs, or bond-specific factors like call risk, credit quality, or de minimis market discount rules that can affect a municipal bond's real after-tax return. Combined rates at or above 100% are not meaningful and the calculator will not produce a result. For a decision involving real money, verify your marginal bracket and any state-specific municipal bond tax treatment with a tax professional or your state's tax authority.

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Questions

Frequently Asked Questions

6 questions

What is the formula for tax-equivalent yield?+

Tax-equivalent yield = tax-free yield / (1 - combined tax rate), where the combined tax rate is your federal marginal rate plus any state marginal rate, expressed as a decimal.

What is a municipal bond?+

A municipal bond ("muni") is debt issued by a state, city, or other local government to fund public projects. Interest paid on most munis is exempt from federal income tax, and often from state tax if you're a resident of the issuing state.

Does being in a higher tax bracket make municipal bonds more attractive?+

Yes. The higher your marginal tax rate, the larger the gap between a municipal bond's stated yield and the taxable yield you'd need to match it after tax, which is why munis are more commonly held by investors in higher tax brackets.

How do I include state taxes in the calculation?+

Enter your state marginal tax rate in the optional State Tax Rate field. The calculator adds it to your federal marginal rate to form a combined rate before dividing it into the tax-free yield.

What units does the calculator use?+

All yields and tax rates are entered and displayed as a percent, for example 4 for a 4% yield or 32 for a 32% tax bracket.

What does the break-even rate tell me?+

It's the marginal tax rate at which your tax-free yield and a specific taxable yield produce the exact same after-tax return. Above that rate the tax-free bond wins; below it, the taxable bond wins.

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Tax-Equivalent Yield Calculator

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