NY State Tax Treatment of Income From Treasury Bond ETFs/MFs

[jeffecohen]

I have a couple of Treasury bond ETFs/MFs (e.g., GOVT). Treasury bond interest is tax free at the state level, but I'm fairly sure the income from these funds will be reported by the brokerage as dividends on a 1099-DIV rather than on Line 3 of a 1099-INT.  Assuming that's the case, is that income still NYS tax free? If yes, where in the NYS interview do enter the data that will appear on Line 28 of NY IT-201, or should I just enter it directly onto the form?

Thanks

[Anonymous_]

This has the potential to present issues with respect to state income tax liability for which you need to review the materials provided by the fund manager.

@Mike9241 

[SteamTrain · Accepted solution]

The interview handles it in the course of the standard 1099-DIV entry, on the pages immediately after the main entries for that 1099-DIV form.

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Pictures below are from 2020, Desktop, and the "Online" software my look a bit different).

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After you indicate what part of the 1099-DIV $$ were from Govt Bond interest, then that amount will be transferred properly to the state forms to be used as needed (might not be 100% of box 1a, since boxes 1a,b may also include dividends from other things you hold at that brokerage...stocks too)).  You do have to add up the proper $$ amount to put in there from whatever Supplemental information the brokerage sends you, or provides after year end.

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[jeffecohen]

@SteamTrain 

Exactly what I was looking for. I've gone through that page dozens of times over the years, but never had treasury funds, so I didn't pay attention.

Thanks for the help.

[jeffecohen]

@Anonymous_ 

You are correct. Treasury funds are NY (and, I assume, all states) tax free. Other bond funds may be as well, if they are "regulated investment companies" (most MFs are). A fund must hold a minimum of 50% "US obligations" assets to be NY tax free. There's a list of about 50 categories that indicates which of them qualify/don't qualify for that designation.

[SteamTrain]

Very true.   Each brokerage may have their own list, but I just checked Fidelity, and each year they publish a PDF file of each of their Mutual funds that had US Govt securities, and the % of the yearly distribution that was from US Govt bonds...

Then they put a "*" next to any fund where the % wasn't high enough to be used for "California, Connecticut, and New York"  ... (so I suspect those 2 other states have the same limitations)

[SteamTrain]

....And I was confused by one Fidelity Govt fund that was marked as not being able to be used by NY, that had almost 55% of its $$ distributions (for 2021) from US Govt bonds.

Then I remembered that the fund has to have 50%+ of its "Assets" in US Govt bonds, not 50%+ of its $$ dividend distributions.  That's kind of a subtle distinction in some cases....and each quarter of the year too.

"Dividends you received from a regulated investment company (mutual fund) that invests in obligations of the U.S. government and meet the 50% asset requirement each quarter qualify for this subtraction."

[jeffecohen]

Fidelity is very good that way. Too bad they only provide the data for their own funds. Its next to impossible to get this type info from the MFs themselves.

Even trying to determine the percentage of NY tax-free assets in national munis is a fools errand (says the fool who used to go poring through all the annual reports every year). Now, I just pick a reasonable flat percentage and apply it to all the nationals. If NY comes after me, I'll pay the difference (hasn't happened yet). If they don't, I'll up the percentage bc it means what I've been using was probably too low and I doubt they'll refund what I overpaid. Unfortunately, I have to wait 3 years to find out - they don't audit until the last possible minute.