How to Calculate Your Combined Federal and State Taxable Equivalent Yield
To calculate your taxable equivalent yield for both federal and state taxes, use this formula:
Let's try an example using the 25 percent federal tax bracket and the 6 percent municipal bond rate. Let us assume your state tax rate is 8 percent, but that your municipal bond return is also free from state tax.
When state taxes are also taken into account, you will have to earn 8.70 percent on a taxable bond to equal your 6 percent municipal bond.
When both federal and state taxes are taken into account, the taxable equivalent yield is higher than the federal taxable equivalent yield. Also, the higher your state tax, the bigger the impact.
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