Tax-Equivalent Yield 2026: Muni vs Treasury vs Private Credit

Every tax-equivalent yield calculator on the first page of Google does the same one-line division. This page does the part they leave out for a reader with $250,000 or more to place: the 3.8% NIIT that sits on top of the 37% bracket, the state layer, the fact that Treasuries are state-exempt while an out-of-state muni is not, and what the same arithmetic says about the thing many investors are actually comparing a muni to in 2026, a non-traded private credit fund paying 9% to 10%. The inputs are the tax rules and the funds' own filings. The one input we do not supply is the muni yield: there is no free primary series for it, so the tables below run from 2.5% to 5.0% and you pick the row.

The formula, and why 40.8% is the number at the top

For a federally tax-free yield y and a combined rate t on the taxable alternative, the taxable yield that leaves you in the same place is y / (1 - t) (our arithmetic). The only judgment is t.

• Federal income tax. Rev. Proc. 2025-32 puts the 37% rate on taxable income over $640,600 for single filers and heads of household and over $768,700 for joint returns in 2026.
• The NIIT. Section 1411(a)(1) imposes 3.8 percent of the lesser of net investment income or the excess of modified adjusted gross income over the threshold: $250,000 for a joint return, $200,000 in any other case (section 1411(b)). Net investment income starts from “gross income from interest, dividends, annuities, royalties, and rents” (section 1411(c)(1)(A)(i)). Tax-free muni interest is not gross income, so it never enters. Taxable bond interest, Treasury interest and a BDC’s dividends do. For a reader in the 32% bracket or above, MAGI is over the threshold, so the NIIT applies; our NIIT page explains the cases that escape it: net investment income tax on real estate.
• State tax. It adds to the rate and, at these incomes, is not offset by a federal deduction. Section 164(b)(7) caps the deduction for state and local taxes at $40,400 for 2026, reduced by 30 percent of MAGI above $505,000, but never below $10,000. That floor is reached at MAGI of $606,333 (our arithmetic: 505,000 + 30,400 / 0.30), below the $640,600 where the 37% bracket starts. Anyone already paying more than $10,000 of state and local tax gets no federal benefit from the next dollar of state tax on this income. Our PTET and SALT cap page covers the workaround some partnerships use.

Step 1: the federal rate, bracket by bracket

Brackets are from Rev. Proc. 2025-32, section 4.01, Tables 1 and 3; the NIIT applies only if MAGI is over $200,000 (single) or $250,000 (joint), so the 24% line is shown both ways. Tax-equivalent yields are our arithmetic. Taxable income and MAGI are different numbers; a joint filer at the start of the 32% bracket ($403,550 of taxable income) is far above $250,000 of MAGI.

Step 2: add your state

The state layer is where the generic calculators go wrong, in both directions. Federal law exempts Treasury interest from state income tax for every state, while a state decides for itself what it does with a muni issued elsewhere. Rates below are the 2025 rate schedules and instructions, the latest each state has published; the 2026 schedules are not out.

We did not build a 50-state table. These six cover the high-tax states where the answer changes, plus the two largest no-tax states, and each row is from the state’s own document. New York City and Yonkers add their own income taxes, which this page does not include. The exemption itself reads: “Stocks and obligations of the United States Government are exempt from taxation by a State or political subdivision of a State” (31 U.S.C. 3124(a)). Dividends from a fund that holds Treasuries are different: California exempts a fund’s dividends only if “at least 50% of its assets” are in tax-exempt U.S. obligations and/or California obligations, and New York allows the subtraction only for a fund that meets a 50% asset test each quarter and only for the part of its income that came from federal obligations.

Step 3: what a muni has to yield

Each cell is the taxable yield that leaves you with the same money after 40.8% federal tax plus the state rate in the column, for an in-state muni that both governments leave alone (our arithmetic: yield / (1 - 0.408 - state rate)). A 3.5% California muni is worth a 7.63% taxable bond to a California resident at the top rate; the same muni bought by a Texas resident is worth 5.91%.

An out-of-state muni is not state-free. The next table compares the two for a 3.5% yield.

The out-of-state column assumes the state taxes the muni interest, as California and New York say they do in their instructions; for New Jersey and Pennsylvania we did not check, so treat those two rows as the case where it is taxed. Formula (our arithmetic): 3.5 x (1 - state) / (1 - 0.408 - state). In the 37% bracket the state rate is the whole difference between 5.91% and 6.61% for a California investor holding someone else’s muni.

Step 4: the Treasury benchmark, on October 21, 2026

The U.S. Treasury publishes the par yield curve every business day. Interest on these obligations is in the NIIT base, so the federal rate is again 40.8%, but the state rate is zero everywhere.

Read the last two columns as a bar for a muni: at the top rate, an in-state muni has to yield more than 3.04% to beat the 10-year Treasury, and more than 2.68% to beat the 1-year (October 21, 2026 yields). An out-of-state muni has to clear the same bar after its own state tax, so in California it needs 3.04 / (1 - 0.133) = 3.50% to match the 10-year. The curve moved up over the year: the 10-year was 4.19% on January 2, 2026 and 5.13% on October 21, 2026, and the 1-year went from 3.47% to 4.52% (U.S. Treasury; the daily values change, so re-check before you rely on the table).

Step 5: the same arithmetic on non-traded private credit

The reason this comparison is live in 2026 is that the largest non-traded BDCs pay 9% to 10% on NAV while a high-bracket investor keeps about 59 cents of each taxable dollar. The funds below are the five largest by net assets in our non-traded BDC list. Figures are Class I, from each fund’s Form 10-Q for the quarter ended June 30, 2026: distributions declared per share in the six months, and NAV per share at June 30, 2026 and December 31, 2025. The annualized rate is distributions x 2 / NAV at June 30 (our arithmetic) and can differ from a fund’s own stated rate.

Read across: at 40.8% federal tax and no state tax, these distributions leave 5.37% to 6.08%. That is the tax-free in-state muni yield that matches them, before any credit loss. Against a 3.5% muni the private-credit fund looks ahead by 1.9 to 2.6 points after tax, and in California by 0.7 to 1.2 points. Two things erase that gap.

First, a distribution is not a return. If a fund pays 10% and its NAV falls, an investor who is taxed on the 10% keeps less than the headline. The next table adds the change in NAV per share over the same six months.

Method (our arithmetic): after-tax return = (distributions x 0.592 + NAV at June 30 - NAV at December 31) / NAV at December 31. It assumes every distribution is ordinary income taxed at 40.8% and that the NAV change is unrealized, so no tax is saved by the decline. Both assumptions are simplifications: part of a distribution can be return of capital or capital gain, and the real split is only reported on Form 1099-DIV after year end; the Apollo Debt Solutions 10-Q says the exact return-of-capital amount “cannot be determined at this point.” NAV can also recover, and the sample is six months. The arithmetic shows how little room a 40.8% rate leaves when NAV slips. See the fund pages for redemption terms and coverage: Blackstone Private Credit Fund, Blue Owl Credit Income, Apollo Debt Solutions, HPS Corporate Lending and Ares Strategic Income; the credit side is in private credit non-accruals.

Second, the deduction is not there. A real estate or REIT investor may know the 20% deduction in section 199A, which applies to “qualified REIT dividends” (section 199A(b)(1)(B)). A BDC’s income is mostly interest on loans, not a REIT dividend, so that deduction does not soften the 37% on it. Our estimated tax page covers how the BDC’s taxes show up on the 1099-DIV.

Where the simple answer breaks

• Private activity bonds. Interest on “specified private activity bonds” is an alternative minimum tax preference item (26 U.S.C. 57(a)(5)(A)), and a fund’s exempt-interest dividends count to the extent of their share of such bonds. A muni that looks tax-free can carry AMT, which the one-line formula ignores.
• Muni interest still counts elsewhere. Tax-exempt interest is added back in the MAGI used for the Medicare Part B income-related premium (42 U.S.C. 1395r(i)(4)(A)(ii)) and in provisional income for the taxation of Social Security benefits (26 U.S.C. 86(b)(2)(B)). Our IRMAA page shows the brackets.
• Muni funds. A fund can pay exempt-interest dividends only if at least 50 percent of its assets are section 103(a) obligations at the end of each quarter (26 U.S.C. 852(b)(5)). The share of a fund’s dividend that is state-exempt varies by state and is shown on the year-end statement.
• Capital gains. A muni bought at a discount, or sold at a gain, produces taxable income; the formula covers coupon income only.
• Below the NIIT line. If MAGI is under $200,000 (single) or $250,000 (joint), the 3.8% does not apply and the 24% and 32% lines in the first table without NIIT are the right ones.
• Rates move. The brackets and thresholds here are 2026. The IRS publishes the 2027 adjustments in the fall; the SALT cap is set by statute at 101 percent of $40,400 for 2027 (section 164(b)(7)(A)(iii)).

What a reader can do with this

These are the questions the arithmetic raises, not recommendations.

• Compute your own row. Take your marginal federal rate, add 3.8% if MAGI is over the NIIT threshold, add your state’s marginal rate, and divide the tax-free yield by one minus the total. Use the in-state or out-of-state column as it applies.
• Compare after tax and after NAV. For a fund that pays 9% to 10%, ask what its NAV per share did over the last two quarters, not only what it paid. The table above takes four minutes in the fund’s Form 10-Q.
• Check the character. Whether a distribution is ordinary income or return of capital decides the tax. It is reported on Form 1099-DIV, which funds send in early the following year.
• Check the state before the bond. An out-of-state muni may be taxed by your state; Treasuries are not.
• Put the pieces in order with a person who sees your return. The choice between a muni ladder, Treasuries and a private credit fund changes your AMT, IRMAA and estimated tax lines, which only your return shows.

This is analysis of public documents, not investment, legal or tax advice. The person who can say what you owe is a CPA or tax attorney with your return.

FAQ

Sources, read and saved on October 22, 2026: Rev. Proc. 2025-32 (IRS); 26 U.S.C. 57, 86, 103, 164, 199A, 852 and 1411, 31 U.S.C. 3124 and 42 U.S.C. 1395r (Legal Information Institute, Cornell, current code); U.S. Department of the Treasury, Daily Treasury Par Yield Curve Rates, 2026 (values for January 2 and October 21, 2026); California Franchise Tax Board, 2025 California Tax Rate Schedules and 2025 Form 540 booklet; New York State Department of Taxation and Finance, 2025 Instructions for Form IT-201; New Jersey Division of Taxation, 2025 NJ-1040 instructions; Pennsylvania Department of Revenue, personal income tax overview; Florida Constitution, Art. VII, s. 5; Texas Constitution, Art. VIII, s. 24-a; Forms 10-Q for the quarter ended June 30, 2026 of Blackstone Private Credit Fund (0001803498-26-000048), Blue Owl Credit Income Corp. (0001812554-26-000047), Apollo Debt Solutions BDC (0001193125-26-341358), HPS Corporate Lending Fund (0001628280-26-056772) and Ares Strategic Income Fund (0001628280-26-054923). Annualized rates, after-tax yields and tax-equivalent yields are CrowdfundedWealth arithmetic. State rates are the 2025 schedules; the 2026 schedules were not yet published.