Taxable equivalent yield

Tax-equivalent yield is a way to compare various fixed-income investments as they may be subject to different levels of taxation (federal, state, and local). It allows you to determine which product will general the highest after-tax return.

General Formula:

$$Tax\text{-}Equivalent\ Yield = \frac{Tax\text{-}Free\ Yield}{1 - Marginal\ Tax\ Rate}$$

US Treasuries are not subject to state and local taxes:

$$Tax\text{-}Equivalent\ Yield = \frac{Treasury\ Yield \times \left(1 - federal\ marginal\ tax\ rate\ \right)}{1 - federal\ marginal\ tax\ rate - state\ marginal\ tax\ rate}$$

In-State Municipal Bonds are not subject to federal, state, or local taxes and would use the general formula.

Out-of-state Municipal Bonds:

$$Tax\text{-}Equivalent\ Yield = \frac{Out{-}of{-}State\ Yield \times \left(1 - state\ marginal\ tax\ rate\right)}{1 - federal\ marginal\ tax\ rate\ - state\ marginal\ tax\ rate}$$

Notably, if you are affected by [net investment income tax|NIIT] or AMT, these formulas above will not encompass the entire calculation