Treasury Bond Tax Calculator 2026 β Federal Taxable, State Exempt
Calculate tax on Treasury bond, T-bill, and TIPS interest. Federally taxable but exempt from all state and local income taxes. Shows state tax savings vs corporate bonds, after-tax yield, and tax-equivalent yield.
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From 1099-INT Box 3 $
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State Tax Saved vs Taxable Bond
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Federal Tax Owed
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After-Tax Interest
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Tax-Equivalent Yield vs Corp Bond
Treasury Interest Tax Breakdown
Treasury Bond Tax Treatment β 2026 Guide
US Treasury securities occupy a unique position in the tax code: their interest is federally taxable as ordinary income but is exempt from all state and local income taxes under 31 USC 3124. This makes them particularly attractive for investors in high-tax states where the combined state savings can substantially boost after-tax returns.
The Tax-Equivalent Yield Formula
Treasury after-tax yield = Gross Yield Γ (1 β Federal Rate)
Corporate bond after-tax yield = Gross Yield Γ (1 β Federal Rate) Γ (1 β State Rate)
Tax-Equivalent Yield (vs fully taxable) = Treasury Yield Γ· (1 β State Rate)
Example: 5% Treasury, 13.3% CA rate β TEY = 5% Γ· (1 β 0.133) = 5.77%
β A CA resident needs a 5.77% corporate bond to beat a 5% Treasury after all taxes.
Corporate bond after-tax yield = Gross Yield Γ (1 β Federal Rate) Γ (1 β State Rate)
Tax-Equivalent Yield (vs fully taxable) = Treasury Yield Γ· (1 β State Rate)
Example: 5% Treasury, 13.3% CA rate β TEY = 5% Γ· (1 β 0.133) = 5.77%
β A CA resident needs a 5.77% corporate bond to beat a 5% Treasury after all taxes.
Example β $10,000 Interest, NY+NYC Resident, 24% Federal
Treasury: Federal tax = $10,000 Γ 24% = $2,400 | State tax = $0 | Net = $7,600
Corporate bond (same $10K): Federal = $2,400 | State (~11.5%) = $1,150 | Net = $6,450
Treasury advantage: $1,150/year on $10K of interest
At $200K invested (5% yield = $10K): Treasury saves $1,150/year vs corp bond.
Corporate bond (same $10K): Federal = $2,400 | State (~11.5%) = $1,150 | Net = $6,450
Treasury advantage: $1,150/year on $10K of interest
At $200K invested (5% yield = $10K): Treasury saves $1,150/year vs corp bond.
Extended
State-by-State Savings Table + Treasury vs Corporate vs Muni Comparison
See exactly how much state-tax exemption saves you and when Treasuries beat corporate bonds and municipal bonds
State-by-State Treasury Savings on $10,000 Interest
| State | State Rate | State Tax if Taxable | Treasury Savings | After-Tax (Treasury) |
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Treasury vs Corporate Bond vs Muni β 3-Way After-Tax Comparison
Using your selected federal rate and state rate. All three bonds assumed to yield the same gross rate for comparison.
| Bond Type | Gross Yield | Fed Tax? | State Tax? | After-Tax Yield | Better Than Treasury? |
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When Treasuries win: The higher your state tax rate, the more valuable the state exemption. At California's 13.3% top rate, a 5% Treasury beats any corporate bond yielding less than 5.77%. Municipal bonds can beat Treasuries if their yield exceeds the muni break-even rate = Treasury Yield Γ (1 β Federal Rate) Γ· (1 β Federal Rate β State Rate).
Frequently Asked Questions
Are Treasury bonds exempt from state and local income taxes?
Yes. Interest income from US Treasury securities β including Treasury bills (T-bills), Treasury notes, Treasury bonds, TIPS (Treasury Inflation-Protected Securities), and STRIPS β is exempt from all state and local income taxes under federal law (31 USC 3124). It is, however, fully taxable at the federal level. This state exemption is especially valuable for residents of high-tax states like California (13.3%), New York+NYC (up to 14.776%), New Jersey (10.75%), or Oregon (9.9%) who can keep significantly more income by choosing Treasuries over similarly yielding corporate or CD income.
How is Treasury interest reported on my tax return?
Treasury interest is reported on Form 1099-INT, Box 3 ("Interest on U.S. Savings Bonds and Treasury obligations"). This is the box specifically for federal-only taxable interest. When you prepare your state return, you subtract Box 3 amounts from your federally taxable interest income β most state tax software handles this automatically. For money market funds holding Treasuries, the fund issues a Statement of Additional Information showing the percentage of income from federal obligations, and you apply that percentage to your dividends from the fund.
What is the tax-equivalent yield and why does it matter?
Tax-equivalent yield (TEY) answers the question: "What yield would a fully-taxable bond need to offer to match the after-tax return of my Treasury?" The formula is: TEY = Treasury Yield Γ· (1 β State Tax Rate). For example, if a Treasury yields 5% and your state rate is 9.9% (Oregon), TEY = 5% Γ· (1 β 0.099) = 5.55%. Any corporate bond or CD must yield MORE than 5.55% to beat the Treasury after state tax. For California at 13.3%: TEY = 5% Γ· 0.867 = 5.77%.
Are I-Bonds and EE Savings Bonds also state-tax exempt?
Yes. Series I Bonds and Series EE Bonds are also US government obligations and their interest is exempt from state and local income taxes. However, unlike Treasury notes and bills where interest is paid periodically and taxable each year (unless you hold to maturity on T-bills), I-Bond interest accrues but is deferred until redemption by default. The state exemption applies in both cases β the interest, whenever recognized, is not taxable by any state or locality.
Do TIPS (Treasury Inflation-Protected Securities) have any special tax treatment?
TIPS have a unique and often misunderstood tax characteristic: the inflation adjustment to the principal is taxable as ordinary income in the year it occurs, even though you do not receive the cash until maturity. This "phantom income" means you owe federal tax on inflation adjustments annually even though the cash stays in the bond. Like all Treasuries, TIPS interest (coupon payments) and inflation adjustments are state-tax exempt. This phantom income issue makes TIPS more tax-efficient when held in tax-deferred accounts (IRA, 401k) rather than taxable brokerage accounts.