Up to date February 2025. Because the brokerage 1099 types for the 2024 Tax 12 months are popping out, here’s a fast reminder for these topic to state and/or native revenue taxes. If you happen to earned curiosity from a cash market fund, a good portion of this curiosity might have come from US Treasury payments and bonds, that are typically exempt from state and native revenue taxes. Nevertheless, as a way to declare this exemption, you’ll probably must manually enter it in your tax return after digging up just a few further particulars.
(Notice: California, Connecticut, and New York exempt dividend revenue solely when the mutual fund has met sure minimal investments in U.S. authorities securities. They require that fifty% of a mutual fund’s belongings at every quarter-end throughout the tax yr include U.S. authorities obligations.)
Let’s take the default money sweep choice for Vanguard brokerage accounts, the Vanguard Federal Cash Market Fund (VMFXX), which has an SEC yield of 4.29% as of 1/31/25. Vanguard has just lately launched the U.S. authorities obligations revenue info for Tax 12 months 2024 [pdf] for all their funds, which states:
This tax replace offers info to assist shoppers correctly report state and native tax legal responsibility on peculiar revenue distributions acquired from mutual fund investments in 2024.
On the subsequent web page, you’ll discover a record of Vanguard funds that earned a portion of their peculiar dividends from obligations of the U.S. authorities. Direct U.S. authorities obligations and sure U.S. authorities company obligations are typically exempt from taxation in most states.1
To search out the portion of Vanguard dividends that could be exempt out of your state revenue tax, multiply the quantity of “peculiar dividends” reported in Field 1a of your Kind 1099-DIV by the share listed within the PDF. Notice that on the IRS Kind 1099-INT, there’s a particular Line 3 that features “Curiosity on US Financial savings Bonds & Treasury obligations”. Nevertheless, for the Vanguard funds, they report on 1099-DIV and never 1099-INT. My Vanguard 1099-INT was all zeros.
For the Vanguard Federal Cash Market Fund (VMFXX), this proportion was 59.87% in 2024. (For reference, it was 49.37% in 2023.) Subsequently, in case you earned $1,000 in whole curiosity from VMFXX in 2024, then $598.70 may probably be exempt from state and native revenue taxes. In case your marginal state revenue tax fee was 10% that will be a ~$60 tax financial savings for each $1,000 in whole curiosity earned. For 2024, this fund met the edge necessities for California, Connecticut, and New York, which require that fifty% of the fund’s belongings at every quarter-end throughout the tax yr include U.S. authorities obligations.
As compared, the Vanguard Treasury Cash Market Fund (VUSXX) had a GOI proportion of 100% in 2024. (For reference, it was 80.06% in 2023.) In case your marginal state revenue tax fee was 10% that will be a $100 tax financial savings for each $1,000 in whole curiosity earned. With a really comparable SEC yield of 4.27% as of 1/31/25, this is the reason many individuals selected to manually purchase VUSXX as a substitute of the default settlement fund as it might earn you a better after-tax rate of interest.
The next Vanguard funds and ETF equivalents have 100% of their curiosity from US authorities obligations:
- Brief-Time period Treasury Index Fund (VGSH, VSBSX)
- Intermediate-Time period Treasury Index Fund (VGIT, VSIGX)
- Lengthy-Time period Treasury Index Fund (VGLT, VLGSX)
- Prolonged Period Treasury Index Fund (EDV)
- Brief-Time period Inflation-Protected Securities
Index Fund (VTIP, VTAPX) - Inflation-Protected Securities Fund (VIPSX, VAIPX)
Notice that a number of different Vanguard funds have a decrease however nonzero proportion of dividends from US authorities obligations, together with the favored Vanguard Goal Retirement Earnings funds. It might be price a more in-depth search for residents of sure states, particularly these with bigger balances and nearer to retirement (holds extra bonds).
To acquire these tax financial savings, you’ll must manually alter your state/native revenue tax return. I don’t consider that TurboTax, H&R Block, and different tax software program will do that mechanically for you, as they received’t have the required info on their very own. (I’m additionally undecided in the event that they ask about it of their interview course of.) If you happen to use an accountant, you also needs to double-check to verify they use this info. Right here is a few info on how you can enter this into TurboTax:
- If you find yourself coming into the 1099-DIV Field 1a, 1b, and 2a – click on the “My type has information in different bins (that is unusual)” checkbox.
- Subsequent, click on on the choice “A portion of those dividends is U.S. Authorities curiosity.”
- On the subsequent display screen enter the Authorities curiosity quantity. This shall be subtracted out of your state return.
Listed here are some hyperlinks to seek out the share of peculiar dividends that come from obligations of the U.S. authorities. It is best to be capable to discover this information for any mutual fund or ETF by looking for one thing like “[fund company] us authorities obligations 2024”]. If you don’t see the fund listed throughout the fund firm, it could be assumed to be 0%. The information is usually not launched till mid-February.
Commonplace disclosure: Examine together with your state or native tax workplace or together with your tax advisor to find out whether or not your state lets you exclude some or the entire revenue you earn from mutual funds that spend money on U.S. authorities obligations.
[Image credit – Tax Foundation]