Interest and Dividends from Mutual Funds in Colorado

[bou10404]

TurboTax asks "Enter interest and dividends from a mutual fund you received during 2022 that are taxable in Colorado but were not subject to federal income tax".

1) The only index fund I hold is Vanguard's Total Stock Market Index (VTSAX). On my 1099-DIV, it says the following:

Percentage of Income from US Government Securities
U.S. Treasury 0.09%
Fed Home Loan 0.07%
Fed Farm Credit 0.00%
Student Loan 0.00%
TN Valley Auth 0.00%
Other Dir. Fed 0.00%

It looks like non of the above sources are taxed by Colorado, so would I just enter $0 for the question above?

2) Since it specifically says "but were not subject to federal income tax", then it sounds like this does not apply to interest from a checking/saving account, as an example. Is that correct?

[MarilynG1]

Yes, you could enter 0 or leave blank.  If you had dividends that were not taxable on your Federal return, Colorado wants you to report those as 'Additions'. (specifically, non-Colorado State and Municipal Bond Interest). 

Here's more info from Colorado.gov.

@bou10404 

[bou10404]

@MarilynG1 Thank you. Sorry if this is a dumb question, but how would one determine if dividends were not taxable on the federal return? Is that indicated on the 1099-DIV?

[LindaS5247]

Yes, It would be indicated on Form 1099-DIV. Enter your Form 1099-DIV as shown into TurboTax.

Non-taxable distributions are generally reported in Box 3 of Form 1099-DIV.

In general, Nontaxable dividends are dividends from a mutual fund or some other regulated investment company that are not subject to taxes. These funds are often not taxed because they invest in municipal or other tax-exempt securities.

Click here for additional information of Form 1099-DIV.

 Click here for additional information of Form 1099-DIV.

[hbl3973 · Accepted solution]

bou10404,

A bit of a clarification to the answers above.  There are two adjustments to Colorado income related to 1099-DIV forms. 

The first is US government interest.  While the IRS does tax such interest, Colorado does not.  (See https://tax.colorado.gov/sites/tax/files/Income20.pdf for exact list of such sources.)  In your case, you are allowed to reduce your CO income by 0.16% of your VTSAX dividend.  You enter this on the screen following the input of the 1099-DIV entries where it ask "Tell us if any of these uncommon situations apply to you"

The second is federally exempt interest which shows up in Box 12 of the 1099-DIV.  This occurs for mutual funds that invest in municipal bonds.  If those underlying bonds were 100% from Colorado, they would also be exempt from Colorado income tax.  In that case, no adjustment would be entered for that TurboTax question.  However, if, say, only 90% of the income were from Colorado bonds and the remaining 10% from other sources, then you would enter 10% of the dividend as taxable by CO even though it was not taxable by the IRS.  https://www.vanguard.com/pdf/INBST_2023.pdf  is the table Vanguard provides for their municipal bond funds.  So had you owned their Municipal Money Market Fund, only 3.75% of the dividend would be excluded from CO tax and you would have to enter 96.25% of the dividend as the answer to the prompt.

Finally, Box 3, non-dividend distributions, is not involved directly with CO vs federal taxation.  Rather, it is the fund (or stock) not having enough profit to pay you their normal dividend but still wanting to give you that same amount to keep you from fleeing that investment.  They do this by in essence giving you part of your investment back and calling it a non-dividend distribution.  This is not taxed because it is not earnings. Your original investment cost basis is lowered, making the tax on any eventual sale profit more costly.  Unless the mutual fund or brokerage firm is taking care of all the accounting machinery for these, it is a major pain for most investors to handle their impact on the cost basis for their investment.  (I have spreadsheets with many dozens of extra columns adjusting for such distributions.)