[Updated on January 30, 2024 for 2023 tax filing.]
When you earn interest from U.S. Treasuries in a taxable account, the interest is exempt from state and local taxes. How the interest is reported on tax forms depends on whether you hold Treasuries directly or through mutual funds and ETFs.
Interest from Treasury Bills and Notes
When you buy individual Treasuries in a taxable brokerage account — see How To Buy Treasury Bills & Notes Without Fee at Online Brokers and How to Buy Treasury Bills & Notes On the Secondary Market — you’ll see the interest reported on a 1099-INT form and/or a 1099-OID form (for TIPS).
Interest from Treasuries is reported separately in Box 3 on a 1099-INT form.
Inflation adjustment for TIPS is reported separately in Box 8 on a 1099-OID form.
Your tax software knows about these special boxes in the tax forms. Whether you import the tax forms from your broker or enter them manually, the software will automatically mark the interest as exempt from your state income tax.
In TurboTax, be sure to check the box “My form has info in more than just box 1 (this is uncommon)” to reveal additional input fields when your 1099-INT form has a number in Box 3.
Interest from Savings Bonds
TreasuryDirect issues a 1099 form when you cash out savings bonds in your TreasuryDirect account. See Report I Bonds Interest in TurboTax, H&R Block, FreeTaxUSA for how to get the 1099 form and enter the interest in tax software.
Treasuries in Mutual Funds and ETFs
Many money market funds, bond funds, and bond ETFs hold Treasuries. If you have these funds in a taxable brokerage account, a good part of the funds’ dividends may have come from Treasuries. The portion of fund dividends attributed to interest from Treasuries isn’t qualified dividends. It’s taxed at normal tax rates for federal income tax but it’s still exempt from state and local taxes.
When you have multiple mutual funds or ETFs in a taxable brokerage account, the broker reports dividends received from all sources on one 1099-DIV form. The 1099-DIV form doesn’t have a special box broken out for dividends attributed to Treasuries. Your tax software won’t know how much of the dividends were from Treasuries only by the numbers on the 1099-DIV form.
The broker supplies a breakdown of the dividends by source. It’s up to you to determine how much of the dividends from each source came from Treasuries. Suppose you own four funds in a taxable brokerage account that paid $6,500 in total dividends. Your goal is to fill out a table like this with the percentage of dividends from Treasuries for each fund and calculate your total dividends attributed to Treasuries:
| Fund | Total Dividend | % from Treasuries | Dividend from Treasuries |
|---|---|---|---|
| Fund A | $500 | 0% | $0 |
| Fund B | $1,000 | 65% | $650 |
| Fund C | $2,000 | 10% | $200 |
| Fund D | $3,000 | 90% | $2,700 |
| Total | $6,500 | $3,550 |
When you give the result to your tax software, it then knows to exempt that portion of the dividends from state and local taxes.
Government % from Fund Managers
Although the 1099-DIV form and the dividend breakdown by funds are provided by the broker, you’ll have to get the number for the “% from Treasuries” column from the managers of your mutual funds and ETFs.
If you own Vanguard mutual funds or ETFs in a Fidelity brokerage account, you get this information from Vanguard, not from Fidelity. Similarly, if you own iShares ETFs in a Charles Schwab brokerage account, you get the information from iShares, not from Charles Schwab.
Google “[name of fund management company] tax center” to find the information from the fund manager.
Vanguard
Vanguard publishes the information in its Tax Season Calendar. Look for “U.S. government obligations information.”
Fidelity
Fidelity publishes the information in Fidelity Mutual Fund Tax Information. Look for “Percentage of Income From U.S. government securities.”
Charles Schwab
Charles Schwab Asset Management publishes the information in its Distributions and Tax Center. Look for “2023 Supplementary Tax Information.”
iShares
iShares (e.g. SGOV) publishes the information in its Tax Library. Look for “2023 U.S. Government Source Income Information.”
State Street (SPDR ETFs)
State Street (SPDR ETFs, e.g. BIL) posts the information in the “Key Information” section of its webpage for individual investors. Look for “SPDR ICI Tax Summary (Secondary)” in Microsoft Excel format.
BlackRock Liquidity Funds
BlackRock Liquidity Funds: Treasury Trust (TTTXX) is a popular money market fund available at Merrill Edge. BlackRock Liquidity Funds have the information in their Tax Resources. Look for “BlackRock Liquidity Funds annual tax letter.”
Federated Hermes
Federated Hermes U.S. Treasury Cash Reserves (UTIXX) is another popular money market fund available at Merrill Edge. Federated Hermes publishes the information in its Tax Center. Look for “2023 Secondary State Tax Information – Domestic.”
CA, NY, and CT Residents
California, New York, and Connecticut have additional requirements for exempting fund dividends earned from Treasuries. The fund management company will note in its published information whether a fund met the requirements of CA, NY, and CT. If a fund didn’t meet the requirements, the Treasuries percentage is treated as 0% for CA, NY, and CT residents.
For example, Vanguard Federal Money Market Fund earned 49.37% of its income from U.S. government obligations in 2023. Because it didn’t meet the requirements of CA, NY, and CT, investors in these three states must still pay state income tax on 100% of this fund’s dividends. People in other states pay state income tax on only 50.63% of this fund’s dividends.
Tax Software
You need to give the result to your tax software after you get the “% from Treasuries” for each fund and calculate your dividend from Treasuries with a table like this:
| Fund | Total Dividend | % from Treasuries | Dividend from Treasuries |
|---|---|---|---|
| Fund A | $500 | 0% | $0 |
| Fund B | $1,000 | 65% | $650 |
| Fund C | $2,000 | 10% | $200 |
| Fund D | $3,000 | 90% | $2,700 |
| Total | $6,500 | $3,550 |
It’s easy to miss the entry point for this input unless you really look for it.
TurboTax
After you import or enter the 1099-DIV form in TurboTax download software, you need to check a box to say that a portion of the dividends is U.S. Government interest. It’s easy to miss because TurboTax says it’s uncommon, which isn’t true.
Now you enter the amount you calculated in your table.
Repeat this process for your other 1099-DIV forms.
H&R Block
H&R Block download software shows a checkbox at the bottom of the 1099-DIV entries. This field doesn’t come in the import. It’s easy to miss because it’s at the bottom of a long form. You have to really look for it.
Although the wording gives the impression of saying 100% of the dividends came from U.S. Treasury obligations, checking the box only says that a part of the dividends came from U.S. Treasury obligations. Check the box and click on Next.
This shows up only if you check that box on the previous screen. Instead of asking for a dollar amount, H&R Block goes by percentage. It forces you to do a bit of math. In our example, $3,550 from Treasuries divided by $6,500 total ordinary dividends is 54.62%. So we enter 54.62.
Although the on-screen help popup says you should split your 1099-DIV form when it includes several funds with different U.S. Treasury percentages, it’s unnecessary to do so. It’s much easier to keep a table on the side and do a bit of simple math as we’re showing here.
Repeat this process for every 1099-DIV. H&R Block software will keep a tally of your state tax-exempt dividends.
FreeTaxUSA
FreeTaxUSA has a radio button at the bottom of the 1099-DIV entries. It’s easy to miss because it’s at the bottom of a long form. You have to really look for it.
The question “Is this a mutual fund that has U.S. Government interest income?” isn’t accurate. A 1099-DIV form from a brokerage account includes dividends from all holdings. It isn’t a mutual fund that has U.S. Government interest income. The correct question should be “Does this include U.S. Government interest income?” Answer “Yes” anyway.
Now you give the dollar amount from your table.
Interest from Agency Bonds
Besides Treasuries, certain government agency bonds are also exempt from state income tax:
- Federal Farm Credit Bank (FFCB)
- Federal Home Loan Bank (FHLB)
- Tennessee Valley Authority (TVA)
If you hold individual bonds (not through a fund) from these agencies, the interest from these bonds is reported on the 1099-INT form but it’s not included in Box 3 as interest from Treasuries and Savings Bonds does. The 1099-INT form is a federal form. It’s not designed to help you with state tax exemption. You should adjust the interest income in the state program of your tax software to make the interest from FFCB, FHLB, and TVA bonds exempt from the state tax.
Do this after you have entered all the 1099-INT and 1099-DIV forms in the federal program. Where exactly you do it in the state program differs by state. I’m using my state (Utah) as an example. Look for similar spots in the state program for your state.
TurboTax
When it comes to adjustments for federal income not taxed by the state (“subtractions”), TurboTax calculates the Treasury interest from the 1099-INT and 1099-DIV entries in the federal program. You can’t change the number here directly but you can go into the Forms mode and look at it there.
The number in the interview comes from a “Subtractions from Income Smart Worksheet.” Right-click on that field and click on “Override.” Add the interest from state tax-exempt agency bonds. Overriding a number in a worksheet doesn’t prevent you from e-filing.
H&R Block
H&R Block software also shows a list of subtractions but U.S. government bond interest isn’t one of them.
There’s a “State Interest Worksheet” in the list of forms.
The worksheet breaks down the total interest between regular interest (from 1099-INT Box 1) and U.S. Obligations (from 1099-INT Box 3).
You can override the allocation between regular interest and U.S. Obligations. Overriding numbers on a worksheet does not prevent e-filing.
***
Most of the work in calculating the amount of the fund dividends exempt from state and local taxes is in hunting down the percentage of income from Treasuries for each fund and ETF in your taxable brokerage account. You need to give the calculated amount to your tax software, which doesn’t make it obvious where the number should go.
A similar process also applies to muni bond funds and ETFs. A portion of the fund dividends is exempt from both federal income tax and state income tax (“double tax-free”). I cover that topic in a separate post State Tax-Exempt Muni Bond Interest from Mutual Funds and ETFs.
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Dave says
Vanguard reports T-bill interest on 1099-INT line 3, not the 1099-OID mentioned in this article.
Harry Sit says
You’re right. I edited the opening paragraphs for accuracy.
Hugh says
The Uncommon situation box doesn’t come up for me regardless of how I input the 1099 INT form. HOw did you get it to come up. Thanks.
Harry Sit says
The 1099-INT form doesn’t need the uncommon situation box. It’s handled automatically when you import the 1099-INT form or manually enter all the numbers on it. Only the 1099-DIV form needs that follow-up question.
CH says
Do you only need to calculate this for ordinary dividends? ie: if the dividends are included in “exempt-interest dividends” (box 12) on the 1099-DIV, are they automatically excluded from taxes in CA using Turbo Tax?
Harry Sit says
Box 12 “Exempt-interest dividends” requires a similar but separate process. It isn’t automatically excluded from taxes in CA. That’ll be covered in the separate post I mentioned at the end.
CH says
Amazing, thanks Harry!
GaryK says
Two things:
1) H&R Block’s instructions actually say to manually break up your summary 1099-DIV into one per fund, entering each separately with its UST % — I like your method much better; but,
2) Vanguard brokerage’s 1099 Detail for Dividends and Distributions only gives a fund-level total of all types of distributions, so I think you have to go through all of the line items to use only a Dividend or S/T Cap Gain (ignoring L/T Cap Gain or Foreign Tax, etc.) to get to the fund’s portion of Box 1a that you then multiply by the fund’s UST%. And this is for Vanguard funds held at Vanguard, which should be the best case.
They do have a breakdown online by fund/category for 2022 on the Dividends & Capital Gains Distributions page, but those are not the official 1099 #’s and I know from experience that they can be off by significant amounts.
What a pain!!
shygamer says
I’m confused. Are you saying S/T Capital Gains are included in the calculation? Because I thought only Dividends were used in the calculation. I’ve been excluding all Capital Gains and non-Dividend distributions from my calculations at Vanguard.
Sam says
VUSXX is 100% treasuries so that should make it state and city tax free in NY?
Harry Sit says
It was 100% in 2022 and therefore 100% state and city tax free in NY in 2022. Current holdings show 23% in repurchase agreements. It won’t be 100% in 2023.
Sam says
Thanks. I didn’t notice that. I think as long as it stays above 50% in government securities should still be eligible for a ny state/city tax discount but now only at 77% instead of 100% if the year end averages at current ratio.
msf says
NY, Calif, Conn. exemption requirements are based on percentage of assets held in Treasuries, not on percentage of Treasury-derived income. So it is possible for a fund to generate more than 50% of its income from Treasuries while still being fully taxable in those states.
For example, in 2019, Fidelity Cash Reserves (FDRXX) and Fidelity Series Government MMF (FGNXX) each had over 50% of its income coming from Treasuries (50.47% and 50.19% respectively) yet failed to qualify for tax-exemption in those states.
https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/taxes/2019-gse-letter-sai-funds.pdf
Greg says
What about interest from U.S. Treasuries held in tax deferred mutual funds (IRA)? When a distribution is made from the IRA is a portion of the distribution state income tax free? If so is the amount indicated on the 1099-R?
Harry Sit says
Interest from U.S. Treasuries held in an IRA doesn’t get special treatment. Some states exempt a certain amount of retirement account distributions but the exemption doesn’t change by whether the IRA earned interest from Treasuries.
Paul O says
The screenshot of HR Block in this article doesn’t at all look like what I see on my H&R data entry screens for 1099-DIV. There is no check box at the bottom that says “From U.S. Treasury obligations”?
Harry Sit says
Maybe you’re using the online version. The download version is both less expensive and more powerful.
Barry Wasserman says
Harry – I spent a good number of hours a few weeks ago trying to figure out exactly the processes you so helpfully explain here. I was successful, though I could have saved myself some sweat and tears by waiting a few weeks for your clear answers. Also, I appreciate your clarifying the additional rules for CA taxpayers like me as that’s an added wrinkle of complexity added on to an already obscure process. You are providing a unique and valuable service by providing this kind of information.
Besides using this info to help me do my taxes this year, it has led me to think about the state tax consequences of my holding a good hunk of “cash” in Vanguard’s default settlement fund, which is the Federal Money Market Fund. When I discovered that this fund held less than 50% in state tax exempt treasury bills and that this meant that all of it would be subject to CA income tax, I tried to switch my settlement account to Vanguard’s Treasury Money Market Fund. I learned, however, that while Vanguard has a number of money market funds, only the Federal MM Fund can be the settlement account. But I was able to accomplish my goal by using all the cash in my settlement account to buy into their Treasury MM Fund. Having my “cash” there is only slightly less liquid than having it in the settlement account, and I can now expect that all or the bulk of its 2023 interest earnings will be free of CA tax. Thank you.
ReaderInCA says
I have done the same – moved funds from VMFMM settlement fund to VUSXX, Treasury Money Market fund, and set up the checkwriting feature so that the funds are more readily available from VUSXX. When setting that up, we have the option of choosing a secondary fund from which funds will be withdrawn if there is not enough in the settlement fund. I chose VUSXX as that secondary fund. For me, that makes all the difference in having the funds more available in case of emergency, although I do keep funds in Ally Savings as an emergency fund also, since the ACH transfer is one day. But being able to write a check immediately is even better.
ReaderInCA says
oops – meant to type VMFXX, not VMFMM as settlement fund!
GaryK says
@shygamer Line 1A of the 1099-DIV includes all mutual fund distributions that are not L/T Capital Gains. Here is the language from the IRS’ instructions to the preparers of the 1099-DIV.
Box 1a. Total Ordinary Dividends
Enter dividends, including dividends from money market funds, net short-term capital gains from mutual funds, and other distributions on stock.
Therefore, in calculating what the total ordinary income from a fund was in order to then calculate the UST portion using the percentage, I believe that S/T Capital Gains need to be included in the total.
shygamer says
Can anyone confirm if GaryK is correct in that S/T Capital Gains are included in calculating the UST portion? If so, I’ve been doing it wrong, and I can’t find the answer with a lot of online searching.
Steve says
@shygamer
To calculate the amount of exempt Federal interest income for state tax purposes, either use the percentage provided by the mutual fund/broker of 1099-DIV box 1a amount, or the state exempt amount provided in the supplemental portion of the brokerage statement.
We must assume that the mutual fund company/broker developed that box 1a percentage based on its information about the income.
Capital gains, short or long term, are not interest income. Since short term capital gains do get included in box 1a, the mutual fund/broker providing federally exempt income based on box 1a would take that into account in calculating its percentage.
But to be clear, capital gains are not interest income, no matter what box they get reported on Form 1099.
shygamer says
@Steve
I see what you’re saying, but I’m confused about why you said capital gains are not interest income? Did you mean to say dividend income instead? Why did you emphasize that?
Steve says
@shygamer
It is federal interest income that is exempt from state income taxes. For investment holdings that income will be reported as “interest” or as “dividends”. What needs to be reported on your state tax return as exempt is federal interest income.
Check the income tax instructions for your state to confirm what I’m saying. Somewhere there will be a line on your state return for such exempt income.
(If this tax stuff was simple, Harry wouldn’t have to write bunches of posts about it. 🙂 )
Harry Sit says
If you own Treasuries directly, the interest you receive from those Treasuries is exempt from state income tax. The capital gains you generate from selling those Treasuries aren’t exempt in most states. When a fund owns Treasuries, it passes both the interest and the capital gains to you as dividends and capital gain distributions.
Suppose a fund passes to you $1,000 in dividends and $200 in short-term capital gain distributions and this fund is the only holding in your brokerage account. Box 1a of the 1099-DIV form shows $1,200. Now suppose the fund earned $120 interest from Treasuries. When the fund management company publishes the percentage from government income, do they show 12% using only the $1,000 dividends as the denominator or 10% using both the dividends and the short-term capital gain distributions as the denominator? I don’t know for sure but I think they will show 10%.
Therefore you will need to use the fund’s contribution to the Box 1a amount on the 1099-DIV form when you multiply by the percentage published by fund management. Short-term capital gain distributions aren’t exempt from state income tax. You only include them when you calculate a number to multiply against the percentage published by fund management that included them in the denominator.
shygamer says
@Steve
Looking at the instructions for Virginia, it says you can deduct any federal obligations income including interest, dividends or gain from your state taxes. Is that not true in other states?
Steve says
@shygamer
Federal laws exempt income from some federal obligations from state taxation. Beyond that, each state defines that state’s income deductions and additions. Yes, every state can differ, as long as the state follows federal law.
Below is what the Ohio Revised Code says:
“(3) Deduct interest or dividends on obligations of the United States and its territories and possessions or of any authority, commission, or instrumentality of the United States to the extent that the interest or dividends are included in federal adjusted gross income but exempt from state income taxes under the laws of the United States.” R.C. 5747.01(A)(3)
Ohio tax instructions also refer to the notice linked at: https://tax.ohio.gov/business/ohio-business-taxes/corporation-franchise/information-releases/cf199201
shygamer says
Does box 1A include interest and dividends despite being called “Total Ordinary Dividends”? Because you stated that only interest is state exempt, not dividends. If box 1A does not include interest, then I would expect none of it to be state tax exempt unless the state law says that dividends are also exempt?
Here’s what it says in my state (VA):
“Enter the amount of any income (interest, dividends and gain)
from obligations of the U.S. that are included in your federal
adjusted gross income, but are exempt from Virginia state tax.
Income from obligations issued by the following
organizations IS NOT taxable in Virginia: Tennessee
Valley Authority, Federal Deposit Insurance Corporation;
Federal Home Loan Bank; Federal Intermediate Credit Bank;
Governments of Guam, Puerto Rico and Virgin Islands; U.S.
Treasury bills, notes, bonds and savings bonds; Federal Land
Bank; Federal Reserve Stock; Farm Credit Bank; ExportImport Bank of the U.S.; U.S. Postal Service; and Resolution
Trust Corporation.
Income from obligations issued by the following
organizations IS taxable in Virginia: Federal Home
Loan Mortgage Corporation, Federal National Mortgage
Association, Government National Mortgage Association,
Inter-American Development Bank, and International Bank
for Reconstruction and Development.”
Does this mean that VA allows dividends and short- and long-term capital gains to be tax exempt even though Federal law says only interest is tax exempt (as you said)? Would I therefore use box 1A and multiply that by the percentages (including only dividends and short-term capital gains) given by Vanguard? What about long-term capital gains? The State law just says “gains”, so I assume it’s talking about both? Would long-term capital gains be included in box 1A for VA calculations as well?
GaryK says
@shygamer The 1099-DIV is only dividends and cap gains. Interest is reported on a 1099-INT. Any interest passed through by a mutual fund is reported as a dividend, which can likely cause some confusion and keep the tax professionals in business. So, for example, although money market funds are invested in interest bearing instruments, the distributions are reported as dividends on a 1099-DIV. Same for treasuries and other bonds in funds. If you hold the bonds directly, then you get a 1099-INT.
Steve says
@shygamer
I looked at the VA instructions you cited and related VA tax laws, regulations, and VA tax department documents.
“Does this mean that VA allows dividends and short- and long-term capital gains to be tax exempt even though Federal law says only interest is tax exempt (as you said)? “
Yes. VA allows exemption of interest, dividends, and gains from US obligations.
“Would I therefore use box 1A and multiply that by the percentages (including only dividends and short-term capital gains) given by Vanguard? “
Yes. You would multiply box 1A by the box 1A US exempt percentage provided by Vanguard.
“What about long-term capital gains? The State law just says “gains”, so I assume it’s talking about both? Would long-term capital gains be included in box 1A for VA calculations as well?”
My reading of VA tax laws is that gains from sale of US obligations, including long-term capital gains, are exempt from taxation in VA. Long-term capital gains are NOT reported in box 1A.
The only way VA permits a taxpayer to exempt interest, dividends, and gains for US obligations from a fund that contains a mixture of exempt US obligations and other non-exempt securities is when the taxpayer can show/prove the exact amounts that are exempt.
On a Form 1099-DIV, long term capital gains are reported in box 2a. You cannot assume that the percentage Vanguard provided for box 1a applies to box 2a.
Unless Vanguard provides you an exempt percentage for any long-term capital gains from US obligations (or 100 % of the fund was invested in US obligations for the entire year), you would NOT be permitted to exempt long-term capital gains for US obligations from a Vanguard mutual fund on your VA tax return.
shygamer says
For H&R Block, you don’t need to calculate the percentage of US obligation income. When you get to your state taxes, they ask you for the dollar amount of US obligation income and you can enter it there.
Barry says
I don’t think this is correct. I also use H&R Block and don’t see anywhere on the state return prompts that asks for Treasury earned income to be manually entered. Instead, on the CA return, I see a comment noting that I reported X-amount of US Treasury income on my federal return and that this amount was being excluded from my state income.
Paul O says
I agree with Barry. Im in Kansas and Schedule S has a field for this on the actual form, but for HRB Online there is not data entry point in the KS state portion to enter it. Instead of fighting it I just abandoned Online and went with download
shygamer says
I’m using the download version. Sounds like the online version is not very good.
Joe says
Harry,
Do you know where to enter this information in Cash App Taxes fka Credit Karma’s free tax filing software? I don’t love it but my income was both too high and had too many complications to use the IRS’s free tax software program one year and now I’m just using it again because it is easier than having to learn a whole new software process and transfer my information.
Thank you.
Harry Sit says
Sorry I don’t know how it works in Cash App Taxes.
Mike says
If you have an HSA account that you’ve carefully invested in Treasury securities so that the interest in CA is not taxable, most brokerages will not give you a 1099 form so you will still need to go to your brokers website, see how much you earned in interest, and then adjust by hand the interest you report so that you do not report Federal interest on your return.
Steve says
I did a double take after reading your post, since earnings from an HSA are not included in federal income.
But then I read that these earnings ARE included in CA (and NJ) state income. UGH. I feel for you, bro.
Steve says
I was very surprised to find when I was doing my taxes that my Fidelity Treasury Money Market Fund (FZFXX) income was only 29 % US government securities in 2022. (And only 29 % exempt from OH tax.)
Misleading/deceptive fund name in my opinion.
This is unlike my Vanguard Treasury Money Market Fund (VUSXX) which had 100 % of its 2022 income as US govt securities.
I discovered Fidelity also has Fidelity Treasury Only Money Market fund which had 93 % of its 2022 income as US govt securities.
Harry Sit says
Vanguard has the best money market funds because they charge low expenses (see Guide to Money Market Fund & High Yield Savings Account). Sadly VUSXX is moving away from 100% Treasuries in 2023 as mentioned in comment #5 above.
bob nisbet says
Thank you for this article, I had not thought that part of my funds could be state tax free like this, or how to claim it.
Steve says
Earlier posts raised the question of whether gains on the sale of US government securities are exempt from state taxation, as is the case for interest and dividends.
The federal law on exemption of government obligations, 31 USC Section 3124, states:
“(a)Stocks and obligations of the United States Government are exempt from taxation by a State or political subdivision of a State. The exemption applies to each form of taxation that would require the obligation, the interest on the obligation, or both, to be considered in computing a tax, except—
(1) a nondiscriminatory franchise tax or another nonproperty tax instead of a franchise tax, imposed on a corporation; and
(2) an estate or inheritance tax.
(b) The tax status of interest on obligations and dividends, earnings, or other income from evidences of ownership issued by the Government or an agency and the tax treatment of gain and loss from the disposition of those obligations and evidences of ownership is decided under the Internal Revenue Code of 1986 (26 U.S.C. 1 et seq.). … “
Note that federal text includes “interest”, but does not specifically mention gains from the sale of obligations.
At least one state, Michigan, has concluded that such capital gains are exempt by the federal exemption law, and thereby are exempt from MI income tax:
“Federal law generally preempts states from taxing any income or gain from obligations of the United States.”
In: https://www.michigan.gov/taxes/rep-legal/rab/rabhtml/2020/revenue-administrative-bulletin-2020-22
Other states, including Indiana and Arizona, specifically state that these capital gains are not exempt from state income tax.
This difference in interpreting what the federal law requires as “exempt” from state taxation probably makes It interesting for brokers and mutual funds to decide whether to report distributions of capital gains from US securities as exempt from state taxation or not.
shygamer says
What are the rounding rules? I’m doing it myself instead of using the program which I find to be more tedious. For example, if the calculation for one item is 5.495, does that round to 5.50 or is that 5.49? Do you then round that to 6 (assuming it rounds to 5.50 instead of 5.49) before adding the other numbers, or do you add 5.5 to the other numbers and then round off the final figure?
For some reason I’m not getting notified of follow-up comments even though I provide an email address and check the “Notify” box.
Steve says
If you are rounding to the nearest dollar, $4.49 is rounded to $4 and $4.50 is rounded to $5.
If rounding percentages, if the percentage is directly entered on a tax form, the form instructions usually specify the number of decimal places.
When I deal with percentages that are not entered directly on a form, I use 2 decimal places.
If what you have are percentages such as 5.495 %, I would round that to 5.5 or 5.50, depending upon whether other percentages have 2 or 3 decimal places.
Or you could round every item to the nearest whole percentage.
Concept is to use the same rounding method, (rounded or exact) for all similar figures on the return, or for a particular type of calculation.
If what you are dealing with is calculating exempt US interest for a state return, it is likely that whichever method you use will not make a large difference in your final tax liability.
Steve says
Re the subject of state exempt US treasury income, I found an interesting Virginia state tax department ruling: https://www.tax.virginia.gov/laws-rules-decisions/rulings-tax-commissioner/18-16
It says that IRA distributions from funds that invest in federal obligations are exempt from Virginia income taxes if the amount of the distribution from federal obligations can be substantiated. It refers to court decisions in two other states.
I had no idea taking state income tax exemption for US obligations from an IRA distribution was possible.
Looks like it would be difficult to substantiate the amount of income from US obligations in an IRA distribution unless the contributions to the IRA were made to an IRA that was only invested in federal securities.
Extract below:
“Pursuant to P.D. 89-180 (5/31/1989), dividends received from a mutual fund that invests exclusively in exempt United States or Virginia obligations are exempt from Virginia income tax. In addition, income from a retirement fund that invests solely in federal obligations must be characterized as income from federal obligations and as exempt from state taxation by 31 U.S.C. § 3124(a). See Keys v. Vermont Department of Taxes, 149 Vt. 658, 552 A.2d. 418 (1987) citing American Bank v. Trust Co. v. Dallas County, 463 U.S. 855 (1983). Accordingly, income received from an IRA that invests in Treasury bills, notes and bonds is exempt. If the IRA invests in federal or state obligations some of which is taxable, the entire income is taxable unless the portion of the exempt income can be substantiated. See P.D. 89-180.”
As such, the portion of the distributions from the Taxpayers’ IRA that were derived from United States instruments qualify for the subtraction under Virginia Code § 58.1-322 C 1.
Louisa says
Are short-term capital gains received from selling a T-bill exempt from state taxes?
Steve says
In some states cap gains from US treasuries are exempt from state taxation, in other states those capital gains are not exempt.
Louisa says
Thanks so much, Steve! Do you know if California taxes them?
Steve says
From what I can see, California includes capital gains from US obligations as taxable income. Put another way, I can find nothing that indicates California exempts capital gains from US obligations from taxable income. States which allow US treasury cap gains to be exempt from income usually state that explicitly.
See FTB Pub 1001 (2021) https://www.ftb.ca.gov/forms/2021/2021-1001-publication.pdf which has guidelines to CA adjustments. Page 7 interest income excludes US obligations interest from income. No mention of excluding capital gains of US obligations from income.
2022 Schedule CA (540) Instructions for Line 2 – interest income gives details of exempting US treasury interest income. https://www.ftb.ca.gov/forms/2022/2022-540-ca-instructions.html
Louisa says
Thank you so much, Steve, for your in-depth response. Much appreciated!
Steve says
Never forget: All free tax advice online is guaranteed to be correct or your money back.
Louisa says
Good to know, LOL!
thefinancebuffReader says
Can this information still be used if you bought or sold shares during the year?
Presumably, the information provided by these fund companies are cumulative values based on dividends paid through out the entire 2022 year. If you sold your treasury fund in July 2022, than the percentage of US govt interest from Jan 2022 through July 2022 might be slightly different than the percentage of US govt interest from Jan 2022 through December 2022.
Harry Sit says
The fund calculates a percentage based on the annual total. It treats every distribution as having the same mix.
TJ says
My H&R Block software doesn’t seem to have a field to enter the % for US treasuries in the interview format, the workaround seems to be to split the 1099-Div into one with the Treasuries box checked, and one without. I guess I could override the % in the forms view, but when you’re invested in multiple funds throughout the year on one consolidated 1099, it seems that you’d have to split it up into multiple entries anyway.
Harry Sit says
It’s not necessary to split it up. Checking the box “From U.S. Treasury obligations” below Box 16 on the 1099-DIV interview screen only says that part of this 1099-DIV comes from U.S. Treasury obligations, not 100% of it. After you check the box and click on Next, the next screen will ask you to enter the U.S. Treasury percentage.
TJ says
Ah, true. My issue is that I have one 1099 with 3 money market funds.
I owned SPAXX, FZFXX and FDLXX at some point during the year. I guess i could math out what the % of that would be appropriate for my state, but seems easier to just split it up?
Harry Sit says
I think it’s easier to make a table and calculate on the side as this post shows, especially when you import the 1099 forms. You still have one 1099 form for the federal return, which matches the actual form from the broker. You’re only adding one extra data point to it for the state return.
Matthew says
In case anyone is wondering, OLT (Online Taxes) also has the ability to handle mutual fund treasury percentages. After entering the 1099-DIV and hitting continue, the next screen asks “If any part of the interest was from government obligations, please enter it here” with a dollar amount box.
If Fidelity will ever get their percentages posted, I’ll be able to make sure the number carries through properly onto the state return. (“Early” February is fast waning, lol.)
Steve says
Matthew:
I am also waiting for Fidelity to post US govt percentages for their govt money market funds. It’s all I need in order to file my return.
Harry Sit says
Fidelity posted a document on their institutional website a couple of weeks ago. It’s not there anymore but I saved a copy. Maybe they took it down for some revisions. For what it’s worth, here are the percentages of some retail money market funds from that document:
SPAXX/FZCXX 41.18%
SPRXX/FZDXX 4.05%
FZFXX 24.19%
FDLXX 90.39%
None met the requirements for CA, CT, and NY except FDLXX. I put these into my spreadsheet but I won’t file until I see them confirmed in the final document for retail investors.
Harry Sit says
Fidelity released the document for retail investors. These percentages are official now.
Steve says
Harry, thank you.
Steve says
With multiple 1099-DIVs from Fidelity and Vanguard, containing both federal exempt dividend income (1099 line 12) and US government securities income (included in 1099 Box 1), and Block tax software which requires exact amounts entered for the state amount of federal exempt income and percentages entries for US government securities, which it then totals together as one number in the state return (with no itemization), confirming Block’s adjustment for state exempt income is one of the most difficult part of return preparation. There needs to be a better way.
I will try the same return in TurboTax to see how it goes.
Harry Sit says
If your state is like my state, which starts with the federal AGI, the income from U.S. government obligations is a subtraction and the income from out-of-state munis is an addition. The two amounts don’t mix.
Steve says
Harry, my state is like your state in how it handles these things.
Using Block the US govt income is generated from percentages I calculate and enter on four separate 1099-DIVs. Block totals them on state return but does not show any itemization (on a mini-worksheet, for example) so I can easily check the results carried forward from my percentage entries.
The Box 12 exempt income exempt in my state is entered directly from three 1099-DIVs on the federal return. But later in the state return, it shares the total of my state exempt income, and asks if I have any related adjustments. Again, no itemization for its adjusted Box 12 total.
In both instances, to confirm if things have carried over properly to the state return from federal entries, I have to manually add up the totals for both items myself. Instead of viewing the entries up in a mini-worksheet on the state return.
Steve says
Block software does not handle US govt exempt dividend (1099DIV Box 12) properly for my Block generated resident state return.
In the Federal return entry for 1099DIV, it asks me to enter the amount of the federal exempt item that is tax exempt in my resident state. Example, Box 12 is $100 but only $80 is exempt in my resident state. I enter $80.
In the resident state return, in the income adjustments section, it says that we see you reported tax-exempt interest/dividends of $total. The total in that statement is all the box 12 income, including the $100 in example above. Unless there is a field below that says to enter the amount that is taxable in resident state. Unless I manually enter $20 in that field, the final state return does not report the $20 income adjustment increase.
What does this mean: With Block software, entering the amount of Box 12 income that is tax exempt in my resident state in the federal return 1099DIV entry section does not carry over/have any effect on the state return. It requires me to manually enter the amount of Box12 income that is NOT exempt in my state.
Block may handle other state returns differently.
Harry Sit says
Entering state tax-free muni income is covered in State Tax-Free Muni Income in TurboTax, H&R Block, FreeTaxUSA. H&R Block does carry it to the state return for my state but only in the text above an input box. Using your example of $100 federal tax-free and $80 state tax-free, it says:
“You have reported $20 of non-[state name] municipal bond interest on your federal return. Enter the portion of this out of state interest that was from bonds or notes acquired after [a specific date].”
Taxable municipal bond interest [blank input box]”
The acquired-after date must be specific to my state when the law changed. The correct input for me is to put $20 from the text above in that box.
Steve says
Block handles my state return input differently than yours.
In state return, Income, Adjustments, first page says:
“Federal Tax-Exempt, but [my state] Taxable Interest and Dividends
We see that you reported tax-exempt interest and/or dividends on your federal return of $100.
Enter the amount of such income from the following that is taxable for [my state] purposes:
Non-[my state] municipal bond interest/dividends: ______ ”
I have to enter the $20 in order for Block state return to show it as an adjustment add.
This is despite the fact I already showed only $80 was taxable to my state on the federal 1099DIV entry. That is not carried over for my state. When the total amount in the “we see that you reported ..” statement comes from many 1099DIV entries, it is easy to overlook the fact that what you entered in federal return has not been carried to state.
If you use Block software, need to check this matter for your state’s return.
CD says
Thank you for this helpful information! Do you know how to enter the amounts in TaxAct?
CD says
Oop! Disregard, I found their instructions. https://www.taxact.com/support/21668/2020/form-1099-div-entering-tax-exempt-in-program
Steve says
After preparing my 2023 Federal and state returns in Turbotax and Block home software, I found Block to be inferior. For mystate, Block does not carry entries I made for resident-state exempt income on the federal return to mystate return. I have to enter the non-exempt adjustment on the state return. Also, Block’s completed state return for filing includes a local income tax return sent to state that I am not required to file and has shows -0- tax liability. No way to delete that local return. For the state’s medical expense adjustment, I have to override and force entries to generate the correct medical adjustment.
For separate federal 1040 schedules (1-3, B, D) and required forms (8949, 8606), Block only prints primary taxpayer name at top, instead of names of both joint filers.
None of the above issues occur with TurboTax. TurboTax step-by-step interview mode is generally easier and more informative than that of Block. The only exception is that entries to claim the foreign tax credit when Form 1115 is not required are unnecessarily complicated.
I’ve used Block home tax software for over 20 years and liked it. Only started using TurboTax a couple of years ago when I needed it for Form 1115. Not any more.
Steve says
Should have been Form 1116, not 1115.
Coriander says
Thanks for this very helpful post, which allowed me to subtract the Treasury portion of fund distributions reported on my 1099-DIV. Now, however, I’m having a problem with my 1099-INT. I own some individual FHLB bonds, and the interest is exempt from state tax, just like Treasuries. However, Fidelity has reported the FHLB bond interest in Box 1 of the 1099-INT, rather than Box 3. I’m using HR Block (desktop/download version) and there doesn’t seem to be any way to subtract this additional interest on my state return (Oregon). The software automatically calculates the subtraction using the amount from Box 3. If I go into the worksheet and do a manual override, it says I won’t be able to efile. Any suggestions? The only workaround I’ve been able to think of is to “correct” the 1099-INT by subtracting the FHLB interest from Box 1 and adding it to Box 3 when I enter it into the software – in which case it won’t match the actual 1099-INT, of course. Any ideas will be appreciated!
Steve says
I don’t have Block’s OR return. I looked over instructions for OR state return. The OR Code for subtracting federal bond interest is 315. Is there a way with the Block OR return to make an entry that would cause the correct subtraction adjustment amount for some related code? That would be technically incorrect, but it would give your OR return the correct amount subtraction amount. It avoids altering the 1099-INT amounts and triggering errors from IRS return matching program.
Block program for my resident state has a place to enter “other” state subtractions, but if your state does not, consider entering the correct subtraction adjustment amount differently. Safer, in my opinion, than altering 1099-DIV numbers on federal return.
Good luck.
Steve says
There is a long thread about this matter on turbotax forum. Title is: ‘Oregon: deducting federal agency bond interest’.
One suggestion there is like mine: Find another subtraction entry on OR state return – one user suggests local government interest – and enter the subtraction amount in that entry.
It would generate the correct subtraction amount.
If you don’t want to fudge the entry on the OR return, then it looks like mailing in the state return is the only option, unless OR provides you some way to efile with the state directly.
Harry Sit says
I agree with Steve to only adjust the state return. Worst case you override in the state return and use the printed forms to file directly with OR on the state’s website. See the link in Free E-File State Tax Return Directly on the State’s Website.
Coriander says
Thanks, I appreciate the help.
Ivan says
Does anyone know how to deduct Treasury ETF dividends from the state tax return on Cash App Tax?
I got this error message when entering the treasury etf dividends as “Illinois Interest Subtractions from Income”:
“The value of deductible interest cannot be more than the amount you claimed as taxable interest on your return.”
Thanks very much.
Harry Sit says
Sorry, I don’t have Cash App Tax. If you can’t figure it out, you can use it to file only federal and file directly with Illinois on the state’s website. See Free E-File State Tax Return Directly on the State’s Website. The subtraction for Treasury interest is on IL Schedule M, Line 22.
Eric says
Were you able to figure it out on Cash App Taxes?
I believe you enter it when doing the State Return, under California Subtractions. Then select Exempt interest dividends.
It says:
Enter here the amount of exempt-interest dividends shown on your annual statement or form 1099-DIV only if the mutual fund had at least 50% of its assets invested in tax-exempt US obligations and/or California municipal obligations. Your annual statement should show the amount that qualified for this exclusion.
Jim says
FreeTaxUSA increases my state tax (MN) after I added 1099 INT with box 3 only, although the comment of the software claims it is excluded. Is this a bug? Should I use another tax filing tool?
Harry Sit says
Try moving the interest from Box 3 to Box 1. If the state tax goes up by an additional amount, the software is doing it correctly in not taxing the interest in Box 3. Move it back to Box 3 after this experiment. The effect you’re seeing is from losing some deductions or credits due to having a higher AGI.
Jim says
Thanks! Yes I tried and it looked like I did lose some deductions.
Mi Taxpayer says
Hmmm. This is all very interesting. I purchase Federal Home Loan Bank (FHLB) and
Federal Farm Credit Bank (FFCB) bonds from Fidelity as they are Michigan State Tax Exempt. In looking at my 1099-INT from Fido I also noticed that while the Tresure Bond Interest is deducted from my State Income (box 3), the Federal Home Loan Bank (FHLB) &
Federal Farm Credit Bank (FFCB) bond interest is NOT as it’s not part of box 3 totals! This is not an insignificant amount with ~ $3K in interest that should not be taxable by Michigan. How would interest with these agency bonds be address with Turbo Tax for Mich filing?
Harry Sit says
See comment #32 above for a discussion on agency bonds. 1099-INT is a federal form. It’s not designed to help you with state tax exemption. Fidelity did it correctly by not including agency bond interest in Box 3. The state tax exemption has to be done in the state program. Poke around in the state part to see how to increase the tax exemption above the number transferred from the federal program. In the worst case you override it on the form and file on paper with the state.
Coriander says
I did end up moving my FHLB interest from Box 1 to Box 3 when I entered the 1099-INT, as I suggested in my comment above (#32). Here’s why I concluded it was ok. When you e-file, there is no electronic 1099-INT that gets submitted, and thus no separate Box 1 and Box 3 amounts for the IRS to match. (This is unlike a W-2, which does get submitted electronically.) The items you enter from the 1099-INT simply flow to Schedule B. Since Box 1 and Box 3 end up combined on Schedule B, there is NO IMPACT on the federal return and the federal e-file submission if you move the FHLB interest to Box 3 – and doing so will result in an accurate state return. Both my federal and state returns sailed through with no problem.
If you’re not comfortable doing this, I think manually filing the state return is your only option as Harry says.
Mi Taxpayer says
Thank you Harry Sit & Coriander on the responses. Coriander’s recommendation on moving my Agency Bond interest from Box 1 to Box 3 when I entered the 1099-INT worked like a charm. No delta in Federal tax amount due and it flows correctly to Michigan return as tax exempt interest. Worked perfectly. Too bad this a mystery item with Turbo Tax that requires this level of manipulation. Perhaps Michigan like Oregon needs to address this more clearly in the filing forms….. Thanks.
Harry Sit says
Altering the 1099-INT is a hack to compensate for a deficiency in software. Coriander did it when H&R Block software doesn’t provide a direct path to make it work. It’s not necessary in TurboTax as msf showed better ways without the hack.
Steve says
I don’t buy into the comment above that IRS has no way to match amounts reported on Form 1099-INT. The IRS is the primary recipient of the Form 1099-INT. Whether the form information is submitted with an e-filed or paper filed return is irrelevant.
The IRS most certainly has the ability to match federal interest reported on a tax return to the related amounts on the 1099-INT it receives from interest payers.
The IRS information return matching program does not normally review many items on returns until 9 to 18 months after filing.
IRS “accepting” a return does not mean Form 1099 information has been matched.
Altering a federal return merely because state tax software handles something wrong is a bad idea.
Coriander says
Steve, of course the IRS has the 1099-INT and will match it to the amounts on the federal return. My point is, the federal return will be exactly the same whether the interest is entered in Box 1 or Box 3, and the IRS will not know (or care) which box you used in the software. There is no alteration of the federal return. The only difference will be in the state return, which will be accurate if the amount is moved. But as noted above, anyone who’s uncomfortable with this should do a manual state return instead.
Harry Sit says
Those aren’t the only two choices. TurboTax makes it easier to tweak the state return but you can still do it in H&R Block. I added a new section for Agency Bonds at the end. Each state program is different. Look for a similar spot. Altering the 1099-INT is easy but too blunt. It’s better to leave the federal part alone and confine the changes to the state part.
msf says
Faking out the software by moving state-exempt interest from box 1 to box 3 (US Treas interest) on the 1099-INT seems a perfectly reasonable workaround for all brands of software. Just be sure that the income really is state-exempt. Here’s a list of different types of federal debt and whether they are state taxable:
https://www.raymondjames.com/wealth-management/advice-products-and-services/investment-solutions/fixed-income/taxable-bonds/government-sponsored-enterprise-debt-securities
I don’t have Michigan, or Oregon, or Illinois Turbotax, but I do have NY and NC. Interesting how they differ. NY is clear. In interview (normal) mode, it has a section called “Changes to Federal Income”. That has “Investment adjustments”, including “Exempt income from US government or exempt by NY law”. That has a box for “US Government Interest” that wasn’t included in box 3.
NC’s interview mode doesn’t have anything like this. But if you enter forms mode, it has a worksheet for state additions and subtractions to income. Under “Deductions from Income” there’s a section for “Interest and Dividend Income from U.S. Government Obligations”. That Smart Worksheet is prefilled with “Interest from U.S. Obligations”. You can create additional entries, e.g. for FHLB interest. TT transfers the total of that smart worksheet into the actual state tax form. No workaround (“move box 1 to box 3”) or override is needed.
There might be something like that for your state.
Aks says
how to find how much div of TTTXX at Merrilledge was exempt from state/local taxes in a given year? Looking for a link similar to vanguard, fidelity etc. tried to find it on blackrock site, https://www.blackrock.com/us/financial-professionals/resources/tax-information, but can not find TTTXX there. Specifically looking for CA tax exempt status. one of the boglehead post says it was 96% exempt for tax year 2022. but can’t find this info for 2023.
Harry Sit says
TTTXX is BLF Treasury Trust Fund. You find the information from BlackRock, not through the broker Merrill Edge. That information is in BlackRock Liquidity Funds annual tax letter found under Tax Resources on BlackRock’s website.
Income from Federal Obligations was 94.07% in 2023 according to that document and it met the requirement for CA, CT, and NY.
Ann says
TurboTax not that easy to deal with. It’s coming up with a number for US obligations that is more than my calculation. We have US treasury money market, T-bills and TIPS—so interest, dividends and OID. We can’t seem to pierce the screen to see what items are included in the final number. If we use, may be getting bill from IRS down the road. If we force change, may be overpaying.