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The basic appeal of municipal bonds is that the interest income is exempt from regular federal income taxation and, in some cases, state taxation as well. The interest paid on municipal bonds is typically a lower percentage than is paid on taxable bonds, but because it is tax-free, it is, in effect, not as low as it appears. Because you generally get to keep all of what you earn on municipal bonds, the effect may be equivalent to that of a higher-paying taxable investment. Typically, the higher your tax bracket, the higher your taxable equivalent yield.
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2008 Federal Rates and Brackets
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25% |
28% |
33% |
35% |
| Single: |
$32,550 -
$78,850 |
$78,851 -
$164,550 |
$164,551 -
$357,700 |
$357,701 and
higher |
| Married: |
$65,100 -
$131,450 |
$131,451 -
$200,300 |
$200,301 -
$357,700 |
$357,701 and
higher |
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Taxable Equivalent Yield (TEY)
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You can compare what a taxable investment would have to yield to match the tax-exempt returns offered by municipal bonds. This involves determining what is commonly referred to as the "taxable equivalent yield" (TEY). To Use the Calculator: - Enter Your Tax Free Yield
- Select your tax bracket and the state in which you live
- Press Calculate
The taxable equivalent yield (TEY) measures what an investor would have to earn (yield) on a taxable (or fully taxable) investment in order to match the yield provided by a tax-exempt municipal bond. The TEY is only one factor that should be considered when purchasing a security, and is meant to be used only as a general guideline when determining taxable equivalent yields for agency and treasury securities. The state tax rates shown represent the maximum state income tax in each state. Some states have lower tax rates within each federal tax bracket in relation to income level and type of filing. If state tax rates are lower than posted, taxable equivalent yields may be lower than shown. The effective combined rate assumes the taxpayer itemizes his / her deductions. The factors do not adjust for: the phase-out of itemized deductions for certain high income taxpayers; the yield to maturity factoring in market discount or market premium, or the effect, if any, of the federal Alternative Minimum Tax (AMT). 2008 tax figures are derived from sources believed to be reliable. Morgan Stanley does not take any responsibility for their accuracy. Federal and state income tax rates can change without prior notification.
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For More Information
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See what our nationally recognized strategists are saying about the current bond market.
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