Why High Earners in the 37% Tax Bracket Are Switching From Treasuries to Municipal Bonds

Gerelyn Terzo

Mon, April 20, 2026 astatine 8:52 AM CDT 6 min read

A 4.5% municipal enslaved output and a 4.29% 10-year Treasury output look astir identical connected paper. For idiosyncratic successful the 35% oregon 37% national taxation bracket, the quality is enormous, and it compounds each twelvemonth they clasp the bond.

This is the halfway mechanic of tax-equivalent yield: disagreement the muni output by 1 minus your marginal taxation complaint to find the taxable output you would request to lucifer it aft national tax.

The 35% and 37% national brackets use to a circumstantial income tier. For 2026, the 35% bracket covers taxable income from $256,226 to $640,600 for azygous filers and $512,451 to $768,700 for joined couples filing jointly. The 37% bracket applies supra those thresholds. These are physicians, attorneys, elder executives, concern owners, and dual-income nonrecreational households. They wage national taxation astatine rates that fundamentally alteration however fixed-income investments should beryllium evaluated.

• Who: Single oregon joined filers successful the 35% oregon 37% national income taxation bracket

• The decision: Whether to clasp taxable bonds (Treasuries, corporates) oregon tax-exempt municipal bonds

• What is astatine stake: After-tax income yield, which tin disagree by 1.5 to 2 percent points annually connected the aforesaid nominal yield

• The complication: Municipal bonds transportation recognition hazard and involvement complaint hazard that Treasuries mostly bash not

Tax-equivalent output answers a circumstantial question: what taxable output would I request to lucifer the after-tax income from a tax-exempt municipal bond? The look is straightforward: disagreement the muni output by 1 minus your marginal taxation rate.

At a existent 10-year Treasury output of 4.29%, a 37% bracket capitalist keeps lone 2.7% aft national tax. Treasuries are exempt from authorities tax, but national taxation inactive takes 37 cents of each dollar of interest. A comparable investment-grade municipal enslaved astatine 4.5% delivers the afloat 4.5% aft national tax. That astir 1.75 percent constituent after-tax dispersed connected a $1 cardinal portfolio translates to $17,500 per twelvemonth successful further after-tax income. Over a 10-year clasp without reinvestment, that is $175,000 successful further income.

The authorities taxation columns usage California's apical marginal complaint of 13.3% and New York's apical marginal complaint of 10.9%. For residents of those states buying bonds issued wrong their location state, some national and authorities taxation exemptions use simultaneously. A California nonmigratory successful the 37% national bracket buying a California muni astatine 5.5% is efficaciously earning the equivalent of 11% connected a taxable bond.