The headline APY is not the number that matters once your state sends a tax bill.
Most comparisons between Treasury bills and CDs stop at the headline yield. A 6-month T-bill is currently yielding 3.68% APY. A competitive 6-month CD is paying around 4.33% APY. On the surface that looks like an easy decision: take the CD.
For a large portion of American savers, that conclusion is wrong.
The reason comes down to one fact that barely gets mentioned in savings coverage: T-bill interest is exempt from state and local income taxes. CD interest is not. For someone living in California, New York, New Jersey, or any other high-income-tax state, that exemption changes the after-tax math entirely, and in some cases flips which product actually pays more.
Nobody has shown the specific numbers for this. Let’s do it properly.
The Tax Difference That Changes Everything
When you earn interest on a CD, you pay federal income tax on it. You also pay state income tax and, in some cities, local income tax. The rate depends on your income bracket.
When you earn interest on a T-bill, you pay federal income tax on it. You pay zero state income tax and zero local income tax. That exemption is not a small thing. In California, the top state income tax rate is 13.3%. In New York City, you can face combined state and city tax of over 14%. In New Jersey, the top rate is 10.75%.
Here is what that actually means for the T-bill versus CD comparison at current rates.
| The after-tax formula: CD after-tax yield = APY x (1 minus federal rate minus state rate). T-bill after-tax yield = APY x (1 minus federal rate only). The difference is several tenths of a percentage point, which on a large deposit is hundreds of dollars. |
The State-by-State After-Tax Comparison
A 4.33% APY 6-month CD compared against a 3.68% APY 6-month T-bill for someone in the 22% federal bracket:
| State | State Tax | CD After-Tax Yield | T-Bill After-Tax Yield | Winner |
| Texas / Florida (no state tax) | 0% | 3.38% | 2.87% | CD wins |
| Pennsylvania | 3.07% | 3.24% | 2.87% | CD wins |
| Virginia | 5.75% | 3.08% | 2.87% | CD wins |
| New York (state only) | 6.85% | 2.99% | 2.87% | CD barely wins |
| New Jersey | 8.97% | 2.88% | 2.87% | Essentially tied |
| Oregon | 9.90% | 2.80% | 2.87% | T-bill wins |
| California (mid bracket) | 9.30% | 2.84% | 2.87% | T-bill wins |
| New York City (state + city) | 14.78% | 2.67% | 2.87% | T-bill wins |
| California (top bracket) | 13.30% | 2.55% | 2.87% | T-bill wins clearly |
The breakeven point is around 6% to 7% state income tax. Below that, the CD at 4.33% APY still wins after tax even though the T-bill headline rate is lower. Above that level, the T-bill wins despite having a lower advertised rate.
California has 39 million people. New York City has 8 million. New Jersey has 9 million. Tens of millions of savers are in states where the T-bill advantage is real and meaningful in dollar terms.
How to Calculate Your Own After-Tax Yield
Step 1: Find your combined marginal tax rate
Add your federal bracket rate and your state income tax rate. For T-bills, only use the federal rate. Example: 22% federal plus 9.3% California = 31.3% combined for a CD, versus 22% only for a T-bill.
Step 2: Apply the formula
CD after-tax yield = CD APY x (1 minus combined rate)
T-bill after-tax yield = T-bill APY x (1 minus federal rate only)
At current rates for a California mid-bracket taxpayer: CD = 4.33% x 0.687 = 2.97%. T-bill = 3.68% x 0.78 = 2.87%. The CD still wins in this case but only by 0.10 percentage points, which on $30,000 over 6 months is roughly $15.
Step 3: Factor in local taxes if applicable
| City residents matter here: If you live in New York City, Philadelphia, Columbus, or another city with its own income tax, add that rate to your combined total. NYC residents paying 3% to 4% in city tax are often better served by T-bills than CDs at current rates. |
When the T-Bill Also Wins on Other Grounds
Deposits over $250,000
FDIC insurance covers $250,000 per depositor per institution. T-bills carry no insurance limit because they are backed by the full faith and credit of the US government. For larger deposits, T-bills eliminate the complexity of managing multiple bank relationships.
If you might need the money before maturity
T-bills can be sold on the secondary market before maturity with minimal price impact. CDs impose early withdrawal penalties, typically 90 days of interest on short-term terms. If there is any realistic chance you need access to the funds, a T-bill gives you an exit that a CD does not.
When the CD Wins
The CD has a clear advantage in no-state-tax and low-state-tax states, and for savers who want the simplicity of a bank account over setting up a TreasuryDirect account or using a brokerage.
CDs also win on longer terms. A 12-month CD is paying around 4.00% to 4.50% APY while the 52-week T-bill yields around 3.90%. For terms beyond 6 months, competitive CDs generally pay more before tax.
| Practical takeaway: If you live in a state with income tax above 6% and are comparing short-term options under 12 months, run the after-tax math before defaulting to the CD. The answer is not always what the headline yield suggests. |
| See what today’s CD rates mean for your specific deposit.Calculate now: highyieldcdcalculator.com |
| Federal and state tax rates cited reflect 2026 tax year brackets as published by the IRS and respective state revenue departments. T-bill yield cited is the 26-week Treasury bill auction rate as of March 16, 2026, per TreasuryDirect. CD rates cited are competitive market rates as of April 2026. This article is for informational purposes only and is not financial or tax advice. Consult a qualified tax professional for advice specific to your situation. |