Many investors include municipal bonds and municipal bond funds in their portfolios as a way to help their own communities, their home states or their country build essential infrastructure and finance other far-reaching projects. Their investments are to be commended as examples of contributing in ways that “do good.”

The U.S. government and many states and local municipalities actively encourage these types of investments by exempting from taxation the net investment income that can be generated by municipal securities. These exemptions, which apply to all taxpayers who hold individual muni bonds or invest in municipal bond funds, mean that a muni investment will provide more after-tax income than a taxable income that has the identical nominal yield. Put another way, the yield on a taxable bond has to exceed the nominal yield on a tax-free bond for the taxable yield to put as much money in an investor’s wallet. (Read more about The Benefits of Tax-Free Investing.)

To compare a tax-free and taxable investment, investors must consider a muni investment’s taxable equivalent yield (TEY). The calculation is dependent on where the investor lives as well as the tax rate levied for the investor’s tax bracket. Our TEY tool can be used to compare yields and to help investors appreciate the difference that tax exemptions make on their municipal holdings.