Level 6

Federal Money Market Fund - taxability in CA

Forum|Forum|2 years ago
February 6, 2024
2 replies
62 views

Hi, I am looking at dividends from the Vanguard federal MM Fund (VMFXX). Based on this from the FTB:

"If the mutual fund has at least 50% of its assets invested in tax-exempt U.S. obligations and/or in California or its municipal obligations, that amount of dividend is exempt from California tax."

This fund is 26.20% US govt obligations and 35.90% US Treasury Bills. I'm wondering if both count as "tax-exempt US obligations" or is it just the treasury bills - hence taxable in CA?

Thanks!

Tax Talk

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qbteachmt

Level 15

https://www.law.cornell.edu/uscode/text/18/8

"The term “obligation or other security of the United States” includes all bonds, certificates of indebtedness, national bank currency, Federal Reserve notes, Federal Reserve bank notes, coupons, United States notes, Treasury notes, gold certificates, silver certificates, fractional notes, certificates of deposit, bills, checks, or drafts for money, drawn by or upon authorized officers of the United States, stamps and other representatives of value, of whatever denomination, issued under any Act of Congress, and canceled United States stamps."

https://smartasset.com/investing/what-are-t-bills-and-should-you-invest-in-them

"The interest income that you may receive from investing in a treasury bill is exempt from any state or local income taxes, regardless of the state where you file your taxes. However, you will need to report interest income from these investments on your federal tax return. This makes treasury bills partially but not fully tax-exempt."

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ptax255Author

Level 6

Thanks for sharing. So if I understand this correctly 100% of these dividends would be taxable in CA?

qbteachmt

Level 15

"So if I understand this correctly 100% of these dividends would be taxable in CA?"

It's written as: "...that amount of dividend is exempt from California tax."

I calculate that 100% of that 62.1% is the exempt component for CA that is from Fed sources. The other 37.9% is the taxable component, or perhaps some is from CA sources (muni). I'm pretty sure all funds report these details.

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qbteachmt

Level 15

I found an article for you, which breaks it down for the prior year. And it explains that holdings will vary year to year, so the fund may or may not qualify, year to year.

https://thefinancebuff.com/best-vanguard-money-market-fund-your-tax-rates.html

This is assuming CA treats Bills the same as Notes and Bonds. Most often, for mutual funds, I just look for "Govt Ob."

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sjrcpa

Level 15

Vanguard does a good job.

U.S. government obligations income information (vanguard.com)

See the asterisks & the fine print

The more I know the more I don’t know.

itonewbie

Level 15

Your client's broker should have literature like the example Susan linked to, which would give a percentage allocation of what is nontaxable interest for US obligations. Similarly, the literature should also provide a percentage allocation for interest from muni bonds as well as private activity bonds of each state.

If you know the name of the fund(s), that information for larger funds would also be publicly available.

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