Glossary
Tax-equivalent yield
Definition
Tax-equivalent yield is the taxable yield needed to match a tax-free yield after tax: tax-free yield ÷ (1 − tax rate). A 3.5% muni yield at a 24% rate equals about 4.61% taxable.
How tax-equivalent yield works
Clients subject to the 3.8%2026 · IRS net investment income tax can include it in the rate.
State tax matters for in-state versus out-of-state bonds.
Why it matters to a firm
It's a direct link between a client's bracket and their bond choices.
| 2026 figure | Source |
|---|---|
| Net investment income tax: 3.8% | IRS |
Questions about tax-equivalent yield
What's the formula?
Tax-free yield ÷ (1 − tax rate).
Should state tax be included?
For in-state bonds, yes.
Who benefits most?
High-bracket investors.
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Related terms: Net investment income tax · Asset location
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