States with Tax-Exempt Interest from U.S. Debt Obligations

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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.

State State Abbreviation Tax-Exempt U.S. Debt Obligations? Notes
Alabama AL Yes  

“Income Exempt from Alabama Income Taxation…
Interest on obligations of the United States or any of its possessions.”

Read more on a guide to Income Exempt from Alabama Income Taxation

See Form FTI

Alaska AK No No income tax.
Arizona AZ Yes See 2021 Line 28
Arkansas AR Yes List exempt income on AR4, Part III

Guide in Subject 201 and Instructions “Exempt from Income Tax”

California CA Limited “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.” (2021 Schedule CA Instructions )
Colorado CO Yes “Interest or dividend income included in federal taxable income from the following sources is deductible for Colorado purposes. Since Colorado income tax is based on federal taxable income, this income should be subtracted from federal taxable income on the Colorado Form 104.
1.Interest on U.S. Treasury bonds, notes, bills, certificates, and savings bonds.” (source )
Connecticut CT Limited “When Owned by Individuals: Under Conn. Gen. Stat. §12-701(a)(20)(A)(i), any income with respect to which taxation by any state is prohibited by federal law (including interest income received from U.S. government obligations) is, to the extent properly includable in gross income for federal income tax purposes, subtracted from federal adjusted gross income in computing Connecticut adjusted gross income.” (source )
Delaware DE Yes “Interest on obligations of the United States and its territories and possessions, or of any authority, commission or instrumentality of the United States, to the extent includable in gross income for federal income tax purposes, but exempt from state income taxes under the laws of the United States;” (source )
District of Columbia DC Yes “Individuals, estates, and trusts shall not, and shall not have been required to, include interest on the obligations of the District of Columbia, a state, a territory of the United States, or any political subdivision thereof, in the computation of District gross income.” (source )
Florida FL No No income tax.
Georgia GA Yes “There shall be subtracted from taxable income interest or dividends on obligations of the United States and its territories and possessions or of any authority, commission, or instrumentality of the United States to the extent includable in gross income for federal income tax purposes but exempt from state income taxes under the laws of the United States.  Any amount subtracted under this paragraph shall be reduced by any interest expenses directly or indirectly attributable to the production of the interest or dividend income.” (source )
Hawaii HI Yes “There are obligations issued by agencies of the U.S. government which contain language prohibiting the levying of a state tax on the interest paid on these obligations; however, there are obligations issued by other U.S. agencies which do not contain such prohibitive language and, therefore, can be subject to a state tax.” (source )
Idaho ID Yes See 2021 Form 39R Line B3
Illinois IL Yes “If you have income from stocks and obligations of the United States Government that is included in your Illinois base income, you may subtract the total amount of income and obligations from your Illinois base income.” (source )
Indiana IN Yes “If you’ve included any interest from U.S. government obligations on your Indiana tax return, you’re eligible for a deduction.” (source )

See 2020 Schedule 2 Line 4

Iowa IA Yes “Deduct interest received from Federal securities (for example U.S. Savings Bonds, U.S. Treasury Notes)” (source ).
Kansas KS Yes “Enter any interest or dividend income received from obligations or securities of any authority, commission or instrumentality of the United States and its possessions that was included in your federal adjusted gross income.”

See 2021 Schedule S Part A10

Kentucky KY Yes “Interest income from United States government obligations upon which states are prohibited by federal law from imposing a tax shall be excluded from gross income when calculating Kentucky income tax liability” (source ).
Louisiana LA Yes “Are interest and dividends from U.S. government obligations exempt from Louisiana income tax? Yes.” (source )
Maine ME Yes TAX STATUS FOR MAINE INCOME TAX OF INTEREST INCOME FROM GOVERNMENT OBLIGATION
Maryland MD Yes “Maryland does not tax interest, dividends, or profit realized from the sale or exchange of United States obligations” (source ).
Massachusetts MA Yes “Additionally, Massachusetts gross income doesn’t include interest on obligations of the United States to the extent such interest is included in federal gross income. These excluded amounts also are reported on Schedule B, Line 1 and subtracted out on Schedule B, Line 6” (source ).
Michigan MI Yes “Michigan taxpayers’ federal incomes are adjusted so that the state does not tax income exempt under 31 USC 3124” (source ).
Minnesota MN Yes “Interest earned on certain U.S. bonds is subject to federal tax but is generally not subject to Minnesota tax” (source ).

See 2021 Schedule M1M, Income Additions and Subtractions Line 14

Mississippi MS Yes “31 U.S.C. Section 3124(a) prohibits states from imposing an income tax on interest income from direct obligations of the United States government” (source ).
Missouri MO Yes See Form MO-A Subtractions (2021 Line 8 )
Montana MT Yes “Interest on United States government obligations, as defined in ARM 42.15.204 , and mutual fund dividends attributable to that interest, to the extent included in federal adjusted gross income, are exempt from Montana income tax” (source ).
Nebraska NE Yes “Any interest and dividends received on United States obligations to the extent such interest and dividends are included in federal adjusted gross income but exempt from state income taxes under the laws of the United States shall be subtracted” (source ).
Nevada NV No No income tax.
New Hampshire NH No No income tax.
New Jersey NJ Yes “U.S. Treasury: Interest Exempt” (Nontaxable Investment Income PDF Pages 5-7 )
New Mexico NM Yes “Income from obligations issued by the United States are not includable in net income” (source ).
New York NY Limited “The subtraction modification applies only if the fund meets the 50% ‘U.S. Obligations’ asset requirement under section 612(c) (1) of the Tax Law” (New York Memo TSB-M-95 4i ).
North Carolina NC Yes See D-400 Schedule S (2021 Line 17 )
North Dakota ND Yes “Interest received from obligations of the United States or of its possessions and from this state or its political subdivisions is not subject to income tax imposed by this state” (source ).
Ohio OH Yes “Division (a) of 31 U.S.C. §3124 exempts from state income taxation ‘stocks and obligations of the United States Government’, as well as ‘the interest on the obligation(s)'” (source ).
Oklahoma OK Yes “If you report interest on bonds, notes, and other obligations of the U.S. on your federal return, it may be excluded from your Oklahoma income if a detailed schedule is furnished, accompanied with 1099s showing the amount of interest income and the name of the obligation from which the interest is earned.”

See 2021 Form 512 Line 5

Oregon OR Yes “Interest and dividend income on obligations of the federal government which are exempt from state income taxation but not from federal income taxation shall be subtracted from federal taxable income in arriving at Oregon taxable income” (source ).
Pennsylvania PA Yes “Interest is not taxable income if received from direct obligations of the Commonwealth of Pennsylvania, its political subdivisions and authorities or the U.S. government” (source ).

See PA Schedule A – Interest Income (2021 Line 7)

Rhode Island RI Yes “Under federal law the State of Rhode Island is precluded from taxing interest received from obligations of the United States” (source ).
South Carolina SC Yes See SC1040 Subtractions (2021 Line 3m )
South Dakota SD No No income tax.
Tennessee TN No No income tax.
Texas TX No No income tax.
Utah UT Yes “Interest earned on U.S. Government obligations is exempt from Utah income tax” (source ).

“Claim this subtraction on Utah from TC-40A, Part 2. Use code 71” (source ).

Vermont VT Yes “Interest income from U.S. government obligations, such as U.S. Treasury bonds, bills, and notes, is exempt from Vermont tax under the laws of the United States” (source ).
Virginia VA Yes See Virginia Form 760 Schedule ADJ Subtractions (2021 Line 4 )

More information in our article “How to Deduct U.S. Debt Obligations on State Tax Returns

Washington WA No No income tax.
West Virginia WV Yes Interest income on obligations of the United States and its possessions to the extent includable in gross income for federal income tax purposes that is exempt from state taxation. W. Va. Code § 11-21-12(c)(1) . (source )
Wisconsin WI Yes “Income from obligations of the United States government and its instrumentalities is not included in income under the income tax law” (source ).
Wyoming WY No No income tax.

 

As always, it is best to confer with a tax professional on matters such as these.

Photo by frank mckenna on Unsplash

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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 700 financial articles. Her most popular post is "The Complete Guide to Your Washing Machine" while one of her favorites is "Funding a 3-Year-Old’s Roth IRA."