PSA: income from U.S. obligations

[Gumby]

Vanguard's popular Federal Money Market Fund had 49.37% U.S. government obligation income for 2023. This is rather unfriendly for residents of states that have "the rule".

Disappointingly close. That's why I moved almost all the money in my settlement account to VUSXX.

 

[jebmke]

Having spent more time on this topic recently than it probably deserves my preference would be for "the rule" states to join the other 47 states and abandon it. This could simplify 1099 reporting and tax return prep.

The point of my recent post was that if Fidelity (for example) offered a competing fund with 50.03% income from U.S. obligations, this would be more friendly to residents of "the rule" states.

does Fidelity not offer a 100% Treasury fund (no repos)?

 

[NatureBoy]

Fidelity Treasury Only

Closest approach: FDLXX 90.39% USGO in 2023

 

[cathy63]

Vanguard's popular Federal Money Market Fund had 49.37% U.S. government obligation income for 2023...

Vanguard provides a list of funds that comply with the CA, CT and NY laws. They're marked with ** in this document: https://investor.vanguard.com/content/dam/retail/publicsite/en/documents/taxes/usgoin-2024.pdf

(Though it would be much nicer if they put the symbol next to the fund name.)

 

[cathy63]

Fido takes the opposite approach to Vanguard, flagging everything that doesn't meet the CA, CT, NY requirements: https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/TY23-GSE-Supplemental-Letter.pdf

 

[SecretlyFI]

Once again, this forum saved me money! Almost $250 from this reminder. Thank you OP! This is the best place on the internet.

 

[Al18]

Observation - if I’m figuring out this out correctly, some of you have really big mutual fund holdings in your brokerage account. As an example, if you held $825,000 of FBALX (a 60% stock/40% bond fund), this fund paid about 4% last year in dividends and capital gains = $33,000. Fidelity says 19% were from US obligations = $6270. If you lived in NJ and had $200,000 total income, your NJ effective tax rate is 4% and this exemption would have saved you $251. Did I figure this out correctly?

 

[mrfeh]

Observation - if I’m figuring out this out correctly, some of you have really big mutual fund holdings in your brokerage account. As an example, if you held $825,000 of FBALX (a 60% stock/40% bond fund), this fund paid about 4% last year in dividends and capital gains = $33,000. Fidelity says 19% were from US obligations = $6270. If you lived in NJ and had $200,000 total income, your NJ effective tax rate is 4% and this exemption would have saved you $251. Did I figure this out correctly?

Can't speak for anybody else, but most of our GOI was from treasuries, I Bond redemptions and money market accounts.

It's only been the last couple years that I've had to pay attention to this, as short-term treasuries and MM funds have become attractive for a portion of our fixed income. I imagine in a couple years, it will become a non-factor again.

 

[N02L84ER]

Thanks to this thread, we saved $200+ on our state taxes this year.

 

[Al18]

Mrfeh,
Thanks for the explanation - that makes sense.

 

[socca]

It's only been the last couple years that I've had to pay attention to this, as short-term treasuries and MM funds have become attractive for a portion of our fixed income. I imagine in a couple years, it will become a non-factor again.

Yep. I wonder how I missed taking this exemption in previous tax years. My relative only mentioned it because my dad used to perform the additional work to claim the exemption on his own tax returns. I remember him mentioning it but I never paid much attention. I prepare the tax returns for a relative and she saved $800 in 2023 state tax by taking the exemption.

 

[RunningBum]

Observation - if I’m figuring out this out correctly, some of you have really big mutual fund holdings in your brokerage account. As an example, if you held $825,000 of FBALX (a 60% stock/40% bond fund), this fund paid about 4% last year in dividends and capital gains = $33,000. Fidelity says 19% were from US obligations = $6270. If you lived in NJ and had $200,000 total income, your NJ effective tax rate is 4% and this exemption would have saved you $251. Did I figure this out correctly?

You would save on the marginal tax rate, not effective.

 

[Montecfo]

Once again, this forum saved me money! Almost $250 from this reminder. Thank you OP! This is the best place on the internet.

Yes I need to check that too as I have some agency interest.

Just spent some time revising all my bond interest down for prepaid accrued interest.

 

[MdaPetralia]

Just made the adjustment in TurboTax and saved $50 on my state return! Thinking of looking back into past returns to see if any are worth amending.

 

[Montecfo]

In my state of Virginia they publish a list of agencies etc from which interest is considered US government. I have a few agency bonds so that helps.

Now my next question is: does discount accretion on those bonds and on Treasuries constitute interest from US obligations? I expect not so will have to research that since I have a lot of that also.

 

[jim584672]

I looked up the law to verify things...

NYS tax law Section 612 - C

(1) Interest income on obligations of the United States ..snip..., at least fifty percent of the value of its total assets, as defined in subsection (c) of section eight hundred fifty-one of the internal revenue code, consists of obligations of the United States and its possessions.

 

[Perryinva]

Both the Fidelity Funds (SPAXX & FDRXX) that some of my divs came from are government MM, with 60% & 62% respectively listed as Treasury related. This was never asked in the question format in the HRB software! I had to manually insert the percentage in a mini form. This reduced my (as yet) unfiled Virginia State tax by $78 Thank you for this PSA!! I absolutely would have never caught this! I went back and looked at last year, the percentages were lower and had lower divs, so the reduction is not worth a refile. But $78 is sure better than a poke in the eye with a stick’

 

[socca]

... I prepare the tax returns for a relative and she saved $800 in 2023 state tax by taking the exemption.

My relative used a tax pro last year to prepare her returns. He didn't claim the exemption on her state tax return. I suspect that many overworked tax pros don't bother to claim the exemption. The exemption amount doesn't appear on the client's consolidated 1099-DIV as a single convenient number to be inserted somewhere into the client's tax return.

 

[mrfeh]

Both the Fidelity Funds (SPAXX & FDRXX) that some of my divs came from are government MM, with 60% & 62% respectively listed as Treasury related. This was never asked in the question format in the HRB software! I had to manually insert the percentage in a mini form. This reduced my (as yet) unfiled Virginia State tax by $78 Thank you for this PSA!! I absolutely would have never caught this! I went back and looked at last year, the percentages were lower and had lower divs, so the reduction is not worth a refile. But $78 is sure better than a poke in the eye with a stick’

Might want to double check your numbers: https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/TY23-GSE-Supplemental-Letter.pdf

Looks like percentage of SPAXX was 41.2% and FDRXX was 40.6%

 

[jebmke]

My relative used a tax pro last year to prepare her returns. He didn't claim the exemption on her state tax return. I suspect that many overworked tax pros don't bother to claim the exemption. The exemption amount doesn't appear on the client's consolidated 1099-DIV as a single convenient number to be inserted somewhere into the client's tax return.

a decent preparer knows all about this. My fellow TaxAide volunteers know about this part of the state return and any preparer allowed to work should not miss it. If I had someone doing mine and they missed this it would be their last miss.