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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