Updated January 2024. As the brokerage 1099 forms for 2023 are coming out, here is a quick reminder for those in states with local income taxes. If you earned interest from a money market fund, a significant portion of this interest may have come from US Treasury bills and bonds, which are generally exempt from state and local income taxes. However, in order to claim this exemption, you’ll have to manually enter it on your tax return after digging up a few extra details.
(Note: California, Connecticut, and New York exempt dividend income only when the mutual fund has met certain minimum investments in U.S. government securities. They require that 50% of a mutual fund’s assets at each quarter-end within the tax year consist of U.S. government obligations.)
Let’s take the default cash sweep option for Vanguard brokerage accounts, the Vanguard Federal Money Market Fund (VMFXX), which has an SEC yield of 5.29% as of 1/29/24. Vanguard has recently released the U.S. government obligations income information for 2023 [pdf] for all their funds, which states:
This tax update provides information to help you properly report your state and local tax liability on ordinary income distributions you received from your mutual fund investments in 2023. On the next pages, you’ll find a list of Vanguard funds that earned a portion of their ordinary dividends from obligations of the U.S. government. Direct U.S. government obligations and certain U.S. government agency obligations are generally exempt from taxation in most states.*
To find the portion of Vanguard dividends that may be exempt from your state income tax, multiply the amount of “ordinary dividends” reported in Box 1a of your Form 1099-DIV by the percentage listed in the PDF. Note that on the IRS Form 1099-INT, there is a special Line 3 that includes “Interest on US Savings Bonds & Treasury obligations”. However, for the Vanguard funds, they report on 1099-DIV and not 1099-INT. My Vanguard 1099-INT was all zeros.
For the Vanguard Federal Money Market Fund, this percentage was 49.37% in 2023. Therefore, if you earned $1,000 in total interest from VMFXX in 2023, then $493.70 could possibly be exempt from state and local income taxes. If your marginal state income tax rate was 10% that would be a ~$50 tax savings for every $1,000 in total interest earned. This could apply to certain residents with enough income in states like Oregon, Hawaii, or Minnesota but not California, Connecticut, and New York due to their unique restrictions mentioned earlier.
However, the Vanguard Treasury Money Market Fund (VUSXX) does meet the threshold requirements for California, Connecticut, and New York as it had a GOI percentage of 80.06% in 2023. If your marginal state income tax rate was 10% that would be a ~$80 tax savings for every $1,000 in total interest earned. With a SEC yield of 5.30% as of 1/29/24, this is why many people chose to manually buy VUSXX instead of the default settlement fund as it can earn you a higher after-tax interest rate.
The following Vanguard funds and ETF equivalents have 100% of their interest from US government obligations:
- Short-Term Treasury Index Fund (VGSH, VSBSX)
- Intermediate-Term Treasury Index Fund (VGIT, VSIGX)
- Long-Term Treasury Index Fund (VGLT, VLGSX)
- Extended Duration Treasury Index Fund (EDV)
- Short-Term Inflation-Protected Securities
Index Fund (VTIP, VTAPX) - Inflation-Protected Securities Fund (VIPSX, VAIPX)
Note that several other Vanguard funds have a lower but nonzero percentage of dividends from US government obligations, including the popular Vanguard Target Retirement Income funds. It may be worth a closer look.
I don’t believe that TurboTax, H&R Block, and other tax software will do this automatically for you, as they won’t have the required information on their own. (I’m also not sure if they ask about it in their interview process.) If you use an accountant, you should also double-check to make sure they use this information. Here is some information on how to enter this into TurboTax:
- When you are entering the 1099-DIV Box 1a, 1b, and 2a – click the “My form has info in other boxes (this is uncommon)” checkbox.
- Next, click on the option “A portion of these dividends is U.S. Government interest.”
- On the next screen enter the Government interest amount. This will be subtracted from your state return.
Here are some links to find the percentage of ordinary dividends that come from obligations of the U.S. government. You should be able to find this data for any mutual fund or ETF by searching for something like “[fund company] us government obligations 2023”]. If you do not see the fund listed within the fund company, it may be assumed to be 0%.
Standard disclosure: Check with your state or local tax office or with your tax advisor to determine whether your state allows you to exclude some or all of the income you earn from mutual funds that invest in U.S. government obligations.
[Image credit – Tax Foundation]
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This is great info! Thanks Jonathan! Two questions:
There is Vanguard cash reserve federal money market and Vanguard federal money market. Do you know the difference?
Where did you get info on Intermediate tax exempt fund for specific state info?
VMRXX is formerly known as Vanguard Prime Money Market fund, a different money market fund than their default sweep.
https://investor.vanguard.com/investor-resources-education/news/changes-to-our-taxable-money-market-fund-lineup
Jonathan, please mention that a number of states, e.g., California, have a 50% in-state threshold to overcome to deduct anything. Notice the ** attached to some funds.
That’s a good point, will add.
Very nice article.
A lot of us have large amounts in the target retirement funds and have been paying unnecessary state taxes
Does Fidelity have similar processes?
Yes, Fidelity publishes a “Percentage of Income From U.S. government securities” document, but it hasn’t been released for 2022 tax year yet. Expected early February.
I think you can find it here: https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/taxes/GSE-Supplemental-Letter.pdf
Using the information from this post saved me $18 of state income tax in Virginia (marginal tax rate 5.75%)
Thank you very much for the great information!
Thanks, Jonathan, for this great info. I had quite a bit of interest from a credit union money market account in 2022. Do you have any insight on how to find the portion of income from government securities from a bank or credit union MMA?
“I don’t believe that TurboTax, H&R Block, and other tax software will do this automatically for you, as they won’t have the required information on their own. (I’m not sure if they ask about it in their interview process.)”
I’m pretty sure that H&R Block includes a question in the interview about percentages.
Thank you so much for publishing this. In H and R Block, you can input this on the “whole form” from your form 1099-DIV after importing it. Look for mini worksheet for Line 1a. First calculate the total percentage of box 1a from treasury obligations by adding up each piece and dividing it by my total dividend. For me it was 28.6%. This changes nothing on your fed but now show it clearly subtracted on my state 🙂
You’re amazing Jonathan. Thank you.
Do an update with fidelity and schwab funds when the information comes out please!
This never gets talked about. How many people are in target funds? You’re awesome.
California does not tax interest dividends from Mutual funds paid by a fund attributable to interest received by US obligations or California state or municipal obligations if at least 50% of the fund assets would be exempt from California tax when held by an individual.
Jonathan you indicated multiply the percentage (from Vanguard’s pdf) times box 1a on the 1099-DIV. Box 1a includes dividends from all my holdings. So wouldn’t I take the dividends I received on the Vanguard MM and multiply it by 37.79%?
I figured it out. I have 4 different brokerage accounts and they report dividends differently on the breakdown of each security.
Joanthan said:
If your marginal state income tax rate was 10%, that would be a ~$38 tax savings for every $1,000 in total interest.
So in IT 201 , where do you find the -$38.00 ? Is it on line 28, Interest income on U.S government bonds?
Thank you
Thanks
Thanks so much for sharing this excellent insight and definitely will come in handy this year with money market yields up to 4.7%. In fact, in looking at Vanguard’s US government obligations income information document and then cross-referencing it against the other short-term cash money market funds, I am planning to switch from VMFXX to the Vanguard Treasury Money Market Fund (VUSXX) because 100% of its interest income should be tax-exempt from NYS income tax.
Thanks Jonathan. I think there is a typo in this sentence where 2022 should be 2023 – “For the Vanguard Federal Money Market Fund, this percentage was 49.37% in 2022”.
Thanks, will fix.
The only way I see how to do it in H&R Block is to have two different 1099-DIV entries because there’s a box to check that says “From US Treasury Obligations” – but it either applies to the whole 1099 or none of it, there doesn’t seem to way to specify a specific amount.
You input it on the state tax return interview. I’ll put up a screenshot shortly.
Look forward to seeing the screenshot. I definitely don’t see this in my H&R Block for California. It asks about federal tax exempt dividends that are taxable for California, but it doesn’t ask about treasuries. 🙁
If there’s a way to split it into multiple 1099’s on the federal interview with the from “US Treasury obligations” checked on one but not the other, I’d love to know.
I meant to say if there is way OTHER than that
Hope this helps:
https://www.mymoneyblog.com/hr-block-us-treasury-interest-mutual-fund.html
DOES MERRILL EDGE FOR TTXX HAS A SIMILAR FORM
WITH TAX EXEMPT LISTING?
Yes, there should be similar information for all mutual funds with significant US Treasury holdings.
Here is the page for Blackrock, which has not yet been updated for 2023.
https://www.blackrock.com/us/individual/resources/tax-information
Thanks
Thanks
Can you change so comments are in reverse chronological order, is most recent comments first? So I don’t have to scroll down to see the latest?
Thanks Jonathan for posting again !
When importing from Vanguard to Turbotax, how do you specify for Vanguard Fed MM dividends ?
Your explanation is for manual input.
I believe that you can edit your 1099-DIV forms after import in TurboTax Desktop. If online after an import, you may need to write or copy down the imported info, then delete the form and manually input all the info again, but check the box that says “A portion of these dividends is U.S. Government interest.”
I’m late to the party, but this was a very helpful post. One among many. Thank you, Jonathan.
Jonathan,
I tried entering VUSXX dividends in TurboTax as you suggested for the question “a portion of these dividends is US government interest”. However, during the federal review section of TurboTax, it asks us to enter the state the interest was earned in. Since this interest is from treasuries, it was not earned in a state. I can get around this by entering the state I live in and it does deduct the interest from the state taxes, but this is not the correct answer to the question. Do you think handling the deduction this way could cause problems ? It seems like H&R Block handles this situation more directly.
I’m not a tax expert, but are you sure they weren’t asking what state *you* were residing in when you earned the interest?