The yields of a few Treasuries as of 10/15/2024 are listed below (see: https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treas... ). Depending on your taxable income and state of residence, the taxable-equivalent yields could be higher than the yields shown below.
1-month: 4.93%
3-month: 4.73%
6-month: 4.42%
1-year: 4.18%
2-year: 3.95%
3-year: 3.86%
5-year: 3.86%
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 $75,000 and who is considering the purchase a 3-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) = 0.0473 x (1 - 0.22) / (1 - 0.22 - 0.093) = 0.0537 = 5.37%. This indicates that the 3-month Treasury Bill at 4.73% appears to have the tax-equivalent yield of a 3-month CD at 5.37%. Changing the taxable income to $150,000 and the tax filing status to married filing jointly produces the same tax-equivalent yield of 5.37%.
If we change the scenario to a 5-year Treasury Note, and again utilize the situation of a California resident who is single with a taxable income of $75,000, s = 0.093 and f = 0.22 as before. So, TEY = Y x (1 - f) / (1 - f - s) = 0.0386 x (1 - 0.22) / (1 - 0.22 - 0.093) = 0.0438 = 4.38%. This indicates that the 5-year Treasury Note at 3.86% appears to have the tax-equivalent yield of a 5-year CD at 4.38%. Changing the taxable income to $150,000 and the tax filing status to married filing jointly produces the same tax-equivalent yield of 4.38%.
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.
Obviously, the tax-equivalent yield results were noticeably higher in late April of this year, but even now you can see a tax-equivalent yield advantage for Treasuries if you reside in a state which has high state income tax rates such as California.
