Municipal Bond Tax-Equivalent Yield Calculator 2026

What Is Tax-Equivalent Yield (TEY)?

Tax-equivalent yield (TEY) is the pre-tax yield a taxable bond would need to deliver to match the after-tax return of a tax-free municipal bond at your marginal tax rate. Because municipal bond interest is exempt from federal income tax under Internal Revenue Code § 103, a 3.5% muni yield to a taxpayer in the 24% federal bracket is effectively the same as a 4.61% taxable bond — the muni "punches above its weight" in your portfolio. The standard formula is: TEY = muni yield ÷ (1 − combined marginal tax rate). Source: 26 U.S.C. § 103.

This calculator extends the basic formula by layering in (1) state income tax for in-state vs out-of-state munis, (2) the 3.8% Net Investment Income Tax (NIIT, IRC § 1411) which applies to the comparison taxable bond but NOT to muni interest, and (3) Alternative Minimum Tax exposure on private-activity bonds (PABs). The result is the most accurate apples-to-apples breakeven yield comparison most retail investors can build without dedicated tax software.

2026 Federal Brackets and the State-Tax Lift

For 2026, the federal ordinary income tax brackets (post-One Big Beautiful Bill Act of 2025, P.L. 119-21, indexed for inflation) are: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. A taxpayer in the 32% federal bracket living in California (13.3% top state rate) and holding an out-of-state muni faces a combined federal-plus-state marginal rate of 41.5% (rough additive). On a 4.0% out-of-state muni, that's a 6.84% TEY — well above what most investment-grade corporate bonds yield in 2026. Holding an in-state California muni eliminates the 13.3% state tax too, pushing the combined rate down to 32% federal (TEY = 5.88%). The state-tax lift is the single biggest driver of TEY for high-tax-state residents.

NIIT (Net Investment Income Tax) of 3.8% applies to taxable bond interest when modified AGI exceeds $200,000 (single) or $250,000 (MFJ). It does not apply to muni interest — another structural advantage for high earners. This calculator includes NIIT in the combined rate when you toggle it on.

In-State vs Out-of-State Munis

Most U.S. states exempt interest on their own municipal bonds from state income tax, creating "double tax-free" treatment for in-state holders. A New York resident holding a New York City General Obligation bond pays no federal tax (IRC § 103) and no New York state or city tax. The same New Yorker holding a California muni pays New York state tax on the interest — wiping out one layer of the savings. Buy in-state if (a) your state has high income tax (CA, NY, MN, OR, MA) and (b) the in-state muni's yield isn't more than ~50 bps below comparable out-of-state munis.

Exceptions: Illinois and Iowa tax their own municipal bonds (no double-exemption). Utah only exempts in-state munis if the issuing state offers reciprocity. Always confirm with your state's Department of Revenue conformity rules before relying on the in-state assumption.

AMT and Private Activity Bonds

Private Activity Bonds (PABs) — munis used to finance private-purpose projects like airports, stadiums, hospitals, and student loans — are taxable for Alternative Minimum Tax (AMT) purposes under IRC § 57(a)(5), even though they're exempt from regular federal income tax. The OBBB Act 2025 (P.L. 119-21) significantly raised the AMT exemption thresholds, so far fewer middle-income taxpayers will hit AMT in 2026 than under pre-OBBB law — but high earners with large PAB holdings can still be affected. If you're unsure whether a muni is a PAB, check the bond prospectus or CUSIP; standard governmental-purpose munis (school districts, water/sewer authorities, general obligation) are not PABs. This calculator's AMT toggle adds the AMT rate (28% top) onto the muni interest portion only when set to "yes." Last updated: May 3, 2026.