Claim State Tax Exemption From Treasuries in Funds and ETFs

[Updated for the 2025 tax year.]

When you earn interest from U.S. Treasuries and other government securities in a taxable account, the interest is exempt from state and local taxes. How to claim the state and local tax exemption depends on whether you hold Treasuries directly or through mutual funds and ETFs.

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.

TurboTax will automatically make the interest in Box 3 of your 1099-INT form state tax-free.

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.

Mutual Funds and ETFs

Many money market funds, bond funds, and bond ETFs hold Treasuries and other U.S. government securities. If you have these funds in a taxable brokerage account, a significant portion of the funds’ dividends may have come from Treasuries and other U.S. government securities. The portion of fund dividends attributed to interest from those holdings isn’t qualified dividends. It’s taxed at normal tax rates at the federal level, but it’s 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 to break out dividends attributed to U.S. government securities. Your tax software won’t know how much of the dividends were exempt from state and local taxes purely 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 and other U.S. government securities. 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 government securities for each fund and calculate your total dividends attributed to government securities:

Fund	Total Dividend	% from Government Securities	$ from Government Securities
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 Government Securities” 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 resources. Look for “2025 Supplementary Tax Information.”

iShares

iShares manages the popular short-term Treasuries ETF SGOV and many other fixed income ETFs. It publishes the information in its Tax Library. Look for “2025 U.S. Government Source Income Information.”

State Street

State Street Investment Management publishes the information under the Document tab of its SPDR ETFs (for example, BIL). Look for “SPDR ICI Tax Summary (Secondary).” It’s an Excel file.

WisdomTree

WisdomTree manages the floating-rate Treasuries ETF USFR. It publishes the information in the Fact Sheets & Reports section of its website. Look for “WisdomTree Fund Distribution 2025 – Tax Supplement” under Fund Reports & Schedules -> Tax Supplement Reports. It’s an Excel file.

BlackRock Liquidity Funds

BlackRock Liquidity Funds: Treasury Trust (TTTXX) is a popular money market fund available at Merrill Edge. BlackRock has the information in its Tax Resources. Look for “BlackRock Liquidity Funds annual tax letter.”

CA, NY, and CT Residents

California, New York, and Connecticut have additional requirements for exempting fund dividends earned from government securities. 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 government securities percentage is treated as 0% for CA, NY, and CT residents.

For example, Vanguard Federal Money Market Fund earned 66.61% of its income from U.S. government obligations in 2025. Because it met the requirements of CA, NY, and CT, investors in these three states, as well as other states, don’t pay state or local income tax on 66.61% of this fund’s dividends.

Enter Into Tax Software

You need to give the result to your tax software after you get the “% from Government Securities” for each fund and calculate your dividend from government securities with a table like this:

Fund	Total Dividend	% from Government Securities	$ from Government Securities
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 in the tax software unless you really look for it.

TurboTax

After you import or enter the 1099-DIV form in TurboTax desktop 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 desktop 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 portion 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 a 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 pop-up says you should split your 1099-DIV form when it includes several funds with different U.S. Treasury percentages, it’s unnecessary to split it. It’s much easier to keep a table on the side and do a bit of simple math, as I’m 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.

Now you give the dollar amount from your table.

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.

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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 U.S. government securities 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.