The tax character of investment income

A dollar of investment income is not a dollar. What you keep depends on its tax character - whether it is taxable, exempt, or preferentially rated, at both the federal and state level. Two bonds quoting the same yield can leave you with meaningfully different amounts after tax. For a household in a high-tax state, that difference is often the whole decision.

The categories that matter

Most tools collapse this into one "tax-exempt" bucket, which quietly misstates the math. The character that actually drives after-tax yield splits along a federal/state axis:

• Fully exempt - in-state municipal bonds (and US territory bonds): exempt from both federal and your state's income tax. (One exception: interest on private-activity munis can be an alternative-minimum-tax preference item, reported separately on your 1099 - so a high-income AMT payer is not always fully exempt.)
• Federal-exempt, state-taxable - out-of-state munis. The interest escapes federal tax but your home state taxes it.
• State-exempt, federal-taxable - direct Treasuries and savings bonds. The opposite case: the IRS taxes the interest, your state does not. (For Treasury funds and ETFs, the state exemption applies only to the share of distributions from qualifying US government obligations, which the fund reports annually, and some states impose a minimum-threshold rule.)
• Qualified dividends and long-term capital gains - taxed at preferential federal rates. (Short-term gains, on assets held a year or less, are taxed as ordinary income.)
• Ordinary income - corporate bond interest, non-qualified dividends, and the often-ordinary bulk of REIT and BDC distributions - taxed at your full marginal rate. (REITs and BDCs can also pay capital-gain or return-of-capital amounts; the split comes from the issuer's 1099, not a blanket assumption.)
• Return of capital - not income while you still have basis; it reduces your cost basis and is deferred until you sell. (Once basis reaches zero, further return-of-capital distributions are taxed as capital gain in the year received.)

A single "tax-exempt" label would overstate the after-tax yield of an out-of-state muni and understate a Treasury by your full state rate. The distinction is the point.

A worked number

A Treasury yielding 4.5% in a state with a 9.85% top rate is worth more after tax than its headline suggests, because the state takes nothing while a taxable bond pays that 9.85% bite on top of federal tax. For a top-bracket resident (37% federal plus the 3.8% net investment income tax), the Treasury's after-tax yield matches a fully-taxable bond yielding about 5.4% - its tax-equivalent yield. An out-of-state muni at 3.6% looks lower still - until you remember it dodges federal tax but not the 9.85% state bite. Comparing them on headline yield gets the ranking wrong. Comparing them on after-tax yield - or the tax-equivalent yield of the exempt bond - gets it right.

How Ironlake treats it

Ironlake makes tax character a first-class field on every income-producing holding rather than an afterthought. The income, fixed-income, and reporting surfaces use it to show after-tax and tax-equivalent yields with the correct state handling - including the handful of states that tax at least some of their own residents' in-state muni interest, a case a single exempt flag would miss. The exact per-state rule comes from Ironlake's state-tax reference data rather than a blanket assumption.

• Try the math without an account: the tax-equivalent muni yield calculator.
• See how it is computed: tax character and after-tax math.

Honest limits

After-tax math depends on your marginal rates, which depend on your full return - so these figures are careful estimates, not a substitute for your tax preparer's numbers. Ironlake shows the character-aware math and flags where state rules diverge; it does not file your return or tell you which bond to buy.

See your after-tax yields