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Tax Equivalent Yield Calculator

Compare tax-free and taxable bond yields

Taxable Investment Is Better

The after-tax yield on the taxable bond (3.80%) exceeds the tax-free yield (3.50%) by 0.30%.

4.61%

Taxable yield equivalent to 3.50% tax-free at 24.00% tax rate

3.80%

Net return on 5.00% taxable yield

$173.13

Tax-free benefit

Inputs
5
Annual Returns

Tax-Free Annual Income

$350.00

Taxable Annual Income (before tax)

$NaN

Annual Taxes Paid

$120.00

Yield Comparison by Tax Rate
Investment Growth (5 Years)
Total Returns (5 Years)
MetricTax-FreeAfter-Tax Taxable
Initial Investment$10,000.00$10,000.00
Total Interest/Gains$1,876.86$2,049.99
Total Taxes Paid$0.00$712.82
Final Value$11,876.86$12,049.99
Understanding TEY

Tax Equivalent Yield (TEY)

The yield a taxable bond must pay to match the after-tax return of a tax-free bond. Formula: TEY = Tax-Free Yield รท (1 - Tax Rate)

When Tax-Free Bonds Make Sense

  • You're in a high tax bracket (32% or higher)
  • The tax-free yield is within 1-2% of taxable yields
  • You want to reduce taxable income
  • Investment is for long-term holding

Tax Considerations

  • Municipal bond interest is usually free from federal tax
  • Some may be free from state and local taxes
  • Capital gains on municipal bonds are taxable
  • Alternative Minimum Tax (AMT) may apply in some cases