Finance Maxxing
Fixed Income & Bonds
Tax-Equivalent Yield
The taxable yield needed to match a tax-exempt bond after taxes.
Tax-equivalent yield converts a tax-exempt yield into its taxable equivalent, enabling apples-to-apples comparison.
Formula
Tax-Equivalent Yield = Tax-Exempt Yield ÷ (1 − Marginal Tax Rate)
Examples at Different Tax Rates
For a 3.5% municipal bond yield:
| Combined Rate | Tax-Equivalent Yield |
|---|---|
| 25% | 4.67% |
| 35% | 5.38% |
| 40% | 5.83% |
| 45% | 6.36% |
| 50% | 7.00% |
The higher your marginal rate, the more valuable tax-exempt income becomes.
Including NIIT
For NIIT-affected taxpayers, include the 3.8% in your rate (since munis are NIIT-exempt):
Effective rate = Federal + State + NIIT
Tax-Equiv Yield = Muni Yield ÷ (1 − Effective rate)