{"id":66249,"date":"2025-02-03T15:47:35","date_gmt":"2025-02-03T15:47:35","guid":{"rendered":"https:\/\/peraltafinancing.com\/business\/finance\/claim-your-state-income-tax-exemption-updated-2025-my-money-blog\/"},"modified":"2025-02-03T15:47:35","modified_gmt":"2025-02-03T15:47:35","slug":"claim-your-state-income-tax-exemption-updated-2025-my-money-blog","status":"publish","type":"post","link":"https:\/\/fivemor.com\/?p=66249","title":{"rendered":"Claim Your State Income Tax Exemption (Updated 2025) \u2014 My Money Blog"},"content":{"rendered":"


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Updated February 2025.<\/strong> As the brokerage 1099 forms for the 2024 Tax Year are coming out, here is a quick reminder for those subject to state and\/or 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\u2019ll likely have to manually<\/strong> enter it on your tax return after digging up a few extra details. <\/p>\n

(Note:<\/strong> 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\u2019s assets at each quarter-end within the tax year consist of U.S. government obligations.)<\/p>\n

Let\u2019s take the default cash sweep option for Vanguard brokerage accounts, the Vanguard Federal Money Market Fund<\/a> (VMFXX), which has an SEC yield of 4.29% as of 1\/31\/24. Vanguard has recently released the U.S. government obligations income information for Tax Year 2024<\/a> [pdf] for all their funds, which states:<\/p>\n

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This tax update provides information to help clients properly report state and local tax liability on ordinary income distributions received from mutual fund investments in 2024.<\/p>\n

On the next page, you\u2019ll 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.1<\/p>\n<\/blockquote>\n

To find the portion of Vanguard dividends that may be exempt from your state income tax, multiply the amount of \u201cordinary dividends\u201d reported in Box 1a of your Form 1099-DIV by the percentage listed in the PDF.<\/strong> Note that on the IRS Form 1099-INT, there is a special Line 3 that includes \u201cInterest on US Savings Bonds & Treasury obligations\u201d. However, for the Vanguard funds, they report on 1099-DIV and not 1099-INT. My Vanguard 1099-INT was all zeros.<\/p>\n

For the Vanguard Federal Money Market Fund (VMFXX), this percentage was 59.87% in 2024.<\/strong> (For reference, it was 49.37% in 2023.) Therefore, if you earned $1,000 in total interest from VMFXX in 2024, then $598.70 could possibly be exempt from state and local income taxes. If your marginal state income tax rate was 10% that would be a ~$60 tax savings for every $1,000 in total interest earned. For 2024, this fund met the threshold requirements for California, Connecticut, and New York, which require that 50% of the fund\u2019s assets at each quarter-end within the tax year consist of U.S. government obligations.<\/p>\n

In comparison, the Vanguard Treasury Money Market Fund<\/a> (VUSXX) had a GOI percentage of 100% in 2024.<\/strong> (For reference, it was 80.06% in 2023.) If your marginal state income tax rate was 10% that would be a $100 tax savings for every $1,000 in total interest earned. With a very similar SEC yield of 4.27% as of 1\/31\/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<\/em> interest rate.<\/p>\n

The following Vanguard funds and ETF equivalents have 100% of their interest from US government obligations:<\/p>\n