A tax-free bond's real advantage depends on your bracket. See the equivalent taxable yield.
A tax-equivalent yield calculator shows the taxable yield you'd need to match a tax-free municipal bond after taxes, given your federal and state tax rates.
Municipal bond interest is often free of federal (and sometimes state) tax, so a muni's stated yield understates its real value to a taxed investor. Tax-equivalent yield = tax-free yield ÷ (1 − your tax rate). It converts the muni into the taxable yield that would leave you the same after-tax income, making a fair comparison possible.
The higher your tax rate, the more a tax-free yield is worth, which is why munis appeal most to high earners. A 3.5% tax-free yield can be equivalent to well over 5% taxable in a top bracket. Include your state rate too if the bond is also state-tax-exempt, which further boosts the equivalent yield for in-state residents.
The taxable yield that would match a tax-free bond after taxes: tax-free yield ÷ (1 − your combined tax rate).
Higher earners, the higher your tax rate, the more a tax-free yield is worth compared to a taxable one.
Yes, if the bond is exempt from your state's tax too. That raises the equivalent yield for in-state investors.
See the exact formula and a worked example on our methodology page.