Income Earned by Government obligations to reduce state/local tax

[kevinr12240]

I am trying to understand what income is used to calculate the amount of income earned from a mutual fund’s U.S. government obligations. In many states, this income can reduce state/local taxes. I have instructions from one manager to exclude short-term capital gains (no mention of long-term) and from another to exclude any capital gains distributions (whether short-term or long-term).

1) What constitutes the income? Is it all dividends except tax-exempt dividends?

For example, one consolidated 1099 shows a breakdown of “Total Dividends and Distributions” by fund including qualified, nonqualified, and Section 199A dividends as well as short-term and long-term capital gains. Which would be included in the income?

2) Once armed with the correct income, you multiply it by the percentage provided by the fund manager in a supplemental tax table found on their website. Is this correct?

Thank you.

[rjs]

1) Use the "Total ordinary dividends" in box 1a of the 1099-DIV.

2) Yes, that's correct.

[kevinr12240]

Thank you for your prompt response.  I will use the full amount of 1099 box 1a (Total Ordinary Dividends).  I still wonder what the fund managers meant by excluding capital gains....confusing! 

[rjs · Accepted solution]

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@kevinr12240 wrote:

I have instructions from one manager to exclude short-term capital gains (no mention of long-term) and from another to exclude any capital gains distributions (whether short-term or long-term).

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Capital gain distributions are in 1099-DIV box 2a and are not included in box 1a, so they are already excluded if you use box 1a. I don't understand what they are saying about short-term capital gains. Maybe these managers are trying to say that you should just use box 1a and don't add anything to it.

[kevinr12240]

Thanks for your help.  Will use the box 1a amount and get these taxes done!