CA Tax Exempt Dividends from mutual funds

[knutter1212]

Hello,

I'd like to clarify the CA tax law for dividends received from mutual funds invested in U.S. obligations.

1. Can you confirm that if the mutual fund has over 50% of funds invested in U.S. obligations then dividends qualify to be CA tax exempt?

2. I need clarification if the entire amount is automatically tax exempt or only the portion/percentage of funds invested in U.S. Obligations is tax exempt.  Let me give you a scenario, and tell me which one is correct:

A. Vanguard VMFXX (Federal Money Market Fund):

         1.  $100 in 2025 Dividends Received

                         a. 67.7% of fund is in U.S. Gov Obligations

                         b.  Is $67.70 CA tax Exempt???

                         c. Is entire $100 CA Tax Exempt???

Thank you

[AmyC]

1. Yes.  Actually US and CA. The CA FTB states: Current state law states that if, at the end of each quarter, a RIC has at least 50 percent of the funds’ assets invested in obligations, which would also be exempt from tax if held by an individual, the tax exempt-interest portion of those dividends would also be tax-exempt in the hands of the RIC's shareholders. Federal and California obligations may be combined to meet the 50 percent asset test.

2. $100 earned 67% is CA tax exempt so $67 is CA exempt. Great question since each state has different rules. CA answer is b.