The yields of a few Treasuries as of 5/31/2024 are listed below (see: https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treas... ). If you are currently considering the purchase of a CD, you may wish to consider a Treasury instead. Depending on your taxable income and state of residence, the taxable-equivalent yields could be higher than the yields shown below.
1-month: 5.48%
2-month: 5.48%
3-month: 5.46%
4-month: 5.46%
6-month: 5.42%
1-year: 5.18%
2-year: 4.89%
3-year: 4.69%
5-year: 4.52%
Using the expression “TEY = Y x (1 - f) / (1 - f - s)” which is appropriate if you are not itemizing deductions, we can calculate the tax equivalent yield [where: “TEY” is the tax equivalent yield, “Y” is the Treasury yield, “f” is the federal marginal tax rate, and “s” is the state marginal tax rate].
For example, consider the situation of a California resident who is single with a taxable income of $70,000 and who is contemplating the purchase a 6-month Treasury Bill. From (https://ca-us.icalculator.com/income-tax-rates/2024.html#personal-income-tax) we find that s = 0.093. From (https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2024) we find that f = 0.22. So, TEY = Y x (1 - f) / (1 - f - s) = 0.0542 x (1 - 0.22) / (1 - 0.22 - 0.093) = 0.0615 = 6.15%. This indicates that the 6-month Treasury Bill at 5.42% appears to have the tax-equivalent yield of a 6-month CD at 6.15%. Changing the taxable income to $140,000 and the tax filing status to married filing jointly produces the same tax-equivalent yield of 6.15%.
If we change the state to Nebraska, and the taxable income amounts remain the same, f = 0.22 as before, and from (https://ne-us.icalculator.com/income-tax-rates/2024.html#personal-income-tax) we find that s = 0.0584 for both the single and the married filing jointly situations. So, TEY = Y x (1 - f) / (1 - f - s) = 0.0542 x (1 - 0.22) / (1 - 0.22 - 0.0584) = 0.0586 = 5.86%.
The annualized tax-equivalent yield results listed above neglect local income tax, NIIT, AMT, and assume that the Treasury Bill and the comparable CD are held in a taxable deposit account.
In states such as Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, and Wyoming which have no state income tax, s = 0, and therefore TEY = Y. [Note: New Hampshire residents with interest and dividend income which exceeds $2,400 annually ($4800 for joint filers) must currently pay a state interest and dividends tax. Interest and dividend income from retirement plans is exempt from this NH state tax.] [Washington state taxes some long-term capital gains on assets such as stocks, bonds and other investments, but the state does not tax income, interest, or dividends.]