How tax-equivalent yield works
A tax-free yield isn’t directly comparable to a taxable one. Tax-equivalent yield converts a tax-advantaged yield into the fully taxable yield that would leave you with the same money after tax:
tax-equivalent yield = after-tax yield ÷ (1 − combined tax rate on fully taxable interest)
Your combined rate here is your federal bracket, plus the 3.8% net investment income tax (NIIT) if your income is over the threshold, plus state and local tax.
How each investment is taxed
- CDs, savings accounts and corporate bonds are taxed everywhere: federal, state, local and NIIT.
- Treasury bills, notes and bonds owe federal tax and NIIT, but no state or local tax.
- Government money market funds are partly state tax-free. The share that comes from Treasuries is exempt from state tax in most states, so enter the fund’s published percentage. Some states (California, Connecticut and New York) only allow the exemption if the fund meets a 50% threshold.
- Municipal bonds are free of federal tax and NIIT. Most states also exempt their own munis but tax other states’. Illinois, Iowa, Oklahoma and Wisconsin tax many of their own issues, and DC exempts everyone’s.
Things this doesn’t model
- Private-activity munis can be subject to the alternative minimum tax.
- Buying a muni below par can create taxable market-discount income.
- Your marginal rate can cross a bracket if the extra interest is large.
Federal brackets and standard deductions are for tax year 2026 (IRS Rev. Proc. 2025-32). NIIT thresholds are $250,000 joint, $200,000 single or head of household, $125,000 separate, using AGI in place of modified AGI.