Some states do not tax their residents on income that was earned on U.S. government obligations. This includes income from U.S. Treasury bills, notes bonds, and savings bonds. It also includes a percentage of dividends and interest paid by mutual funds, exchange-traded funds, and money market funds which hold U.S. debt obligations.
As a premium service to Comprehensive level clients, we strive to calculate the interest earned on U.S. debt obligations from the funds in their portfolios so that they can adjust their state income tax accordingly.
That being said, only most states exempt taxation from U.S. debt obligations. There are some which either do not have an income tax, do not exempt U.S. debt, or limit the exemption in some way.
To the best of my knowledge in tax year 2021, here is an overview of how the states and jurisdictions handle interest on certain U.S. government obligations.
“Income Exempt from Alabama Income Taxation…
Interest on obligations of the United States or any of its possessions.”
As always, it is best to confer with a tax professional on matters such as these.
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Megan Russell has worked with Marotta Wealth Management most of her life. She loves to find ways to make the complexities of financial planning accessible to everyone. She is the author of over 800 financial articles and is known for her expertise on tax planning.
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