Are federal money market funds which issue dividends eligible for state income tax exclusion? These dividends are reported on 1099-div not 1099-int.

Forum|Forum|6 years ago
February 19, 2020
2 replies
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htbikerAuthor

Level 2

I am answering my own question for the state of Colorado. The following web site defines in detail what is acceptable for an exclusion.

https://www.colorado.gov/pacific/sites/default/files/Income20.pdf

Then I looked up my federal money market fund to determine what type of government obligations it contains.

https://investor.vanguard.com/mutual-funds/profile/VMFXX

Scroll down and see a list of the government obligations contained in the fund. Only the "repurchase agreements" (15.1% of the portfolio) aren't included in excludable interest (reference the first web page above).

So I am entering 84.9% of the 1099 dividends as excludable interest for this fund.

3216868

Level 2

Is North Carolina exempt from interest on u.s. government securities?

DeanM15

Level 10

On a North Carolina return, interest income from US Government obligations, like US Treasury Bonds and US Savings Bonds, are deducted from Federal Adjusted Gross Income. They are tax-free.

@3216868

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jhobryan

Level 2

Are Vanguard Municipal Money Market (VMSXX) dividends taxable in Virginia? One would think that TT would automatically add them in from the Federal Return if they were taxable but TT did not. TT just asks about US Bond Income exempt from taxation. Do I need to enter this myself from the 1099-DIV or should I leave it blank?

VictoriaD75

Level 12

Generally, municipal bond interest is federally exempt. However, it may be taxable in some states. In Virginia,

Va. Code §58.1-322 C provides a subtraction, to the extent included in federal adjusted gross income, for:

1. Interest or dividends on obligations of the United States and on obligations or securities of any authority, commission or instrumentality of the United States to the extent exempt from state income taxes under the laws of the United States including, but not limited to, stocks, bonds, treasury bills, and treasury notes, but not including interest on refunds of federal taxes, interest on equipment purchase contracts, or interest on other normal business transactions.

2. Interest on obligations of this Commonwealth or of any political subdivision or instrumentality of this Commonwealth.

Therefore, it depends on the source of the interest income.The following is state with regard to mutual funds.

Mutual Funds. The department recognizes that interest or dividends on exempt U.S. or Virginia obligations received by a mutual fund and passed through to the shareholders in qualifying distributions will retain their exempt status in the hands of the mutual fund shareholders. However, as provided in VR 630-2-322, when taxable income in commingled with exempt income, all income is presumed to be taxable unless the portion of income which is exempt from Virginia income tax can be determined with reasonable certainty and substantiated. Thus, distributions from a mutual fund which invests exclusively in U.S. or Virginia obligations are generally exempt for Virginia income tax purposes.

You will need to determine the source of the interest income to verify whether or not it is taxable in Virginia.

Virginia Tax

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