Are Treasury Bond Fund dividends taxable in NY?

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Dolomite
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Are Treasury Bond Fund dividends taxable in NY?

Post by Dolomite » Sun Feb 08, 2015 3:39 pm

After a brief search, I am still looking for an answer to this simple question.
Are ordinary dividends from a mutual fund that is 100% in Treasury bonds taxable in New York?

If the answer is No, then I assume that I may claim the dividends as a New York State subtraction (line 28 on form IT-201).
However, this subtraction specifies Interest Income from U.S. Government Bonds, not dividends.

Thanks for any help.
With best wishes,
-D

Grt2bOutdoors
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Re: Are Treasury Bond Fund dividends taxable in NY?

Post by Grt2bOutdoors » Sun Feb 08, 2015 3:45 pm

Dolomite wrote:After a brief search, I am still looking for an answer to this simple question.
Are ordinary dividends from a mutual fund that is 100% in Treasury bonds taxable in New York?

If the answer is No, then I assume that I may claim the dividends as a New York State subtraction (line 28 on form IT-201).
However, this subtraction specifies Interest Income from U.S. Government Bonds, not dividends.

Thanks for any help.
With best wishes,
-D
Let's not confuse the two - coupon income derived 100% from U.S. Treasury securities are tax-exempt in New York State. The fact that a mutual fund paid out the interest income in the form of dividends is irrelevant. The only thing you need to prove is that the income is indeed directly received from U.S. Treasury securities. Therefore, you can claim interest dividends from US Treasury Securities on line 28 of Form IT-201.

Here is the exact verbiage found on page 16 from the instruction booklet for IT-201 for the 2014 tax filing year:
"Dividends you received from a regulated investment company
(mutual fund) that invests in obligations of the U.S. government
and meet the 50% asset requirement each quarter qualify for this
subtraction. The portion of such dividends that may be subtracted
is based upon the portion of taxable income received by the
mutual fund that is derived from federal obligations.
Contact the mutual fund for further information on meeting the
50% asset requirement and computing your allowable subtraction".
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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Phineas J. Whoopee
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Re: Are Treasury Bond Fund dividends taxable in NY?

Post by Phineas J. Whoopee » Sun Feb 08, 2015 3:57 pm

Dolomite wrote:After a brief search, I am still looking for an answer to this simple question.
Are ordinary dividends from a mutual fund that is 100% in Treasury bonds taxable in New York?
No, nor in any state, or any municipality within one.
Dolomite wrote:If the answer is No, then I assume that I may claim the dividends as a New York State subtraction (line 28 on form IT-201).
Yes. I looked up the form and its instructions, the latter of which says, for line 28:
New York State Form IT-201 Instructions, on p. 16, wrote: ...
Dividends you received from a regulated investment company (mutual fund) that invests in obligations of the U.S. government and meet the 50% asset requirement each quarter qualify for this subtraction. The portion of such dividends that may be subtracted is based upon the portion of taxable income received by the mutual fund that is derived from federal obligations.

Contact the mutual fund for further information on meeting the 50% asset requirement and computing your allowable subtraction (if any).
...
[Edited to add] Just like Grt2bOutdoors said and quoted while I was still looking things up!

PJW

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Dolomite
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Re: Are Treasury Bond Fund dividends taxable in NY?

Post by Dolomite » Sun Feb 08, 2015 6:05 pm

Grt2bOutdoors and Phineas:
Thank you for the concise answers.
As usual, when all else fails, read the instructions!
With best regards,
--D

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grabiner
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Re: Are Treasury Bond Fund dividends taxable in NY?

Post by grabiner » Sun Feb 08, 2015 6:15 pm

Grt2bOutdoors wrote:Here is the exact verbiage found on page 16 from the instruction booklet for IT-201 for the 2014 tax filing year:
"Dividends you received from a regulated investment company
(mutual fund) that invests in obligations of the U.S. government
and meet the 50% asset requirement each quarter qualify for this
subtraction. The portion of such dividends that may be subtracted
is based upon the portion of taxable income received by the
mutual fund that is derived from federal obligations.
Contact the mutual fund for further information on meeting the
50% asset requirement and computing your allowable subtraction".
To get this data from Vanguard, go to "Tax Center" and "Information for Specific Vanguard Funds". Some of Vanguard's bond index funds are more than half Treasuries, and thus qualify under this rule; meanwhile, some of the Treasury funds are not 100% Treasuries, and thus qualify for only a partial exclusion of dividends.
Wiki David Grabiner

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neurosphere
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Re: Are Treasury Bond Fund dividends taxable in NY?

Post by neurosphere » Thu Nov 02, 2017 2:03 pm

Grt2bOutdoors wrote:
Sun Feb 08, 2015 3:45 pm

Here is the exact verbiage found on page 16 from the instruction booklet for IT-201 for the 2014 tax filing year:
"Dividends you received from a regulated investment company
(mutual fund) that invests in obligations of the U.S. government
and meet the 50% asset requirement each quarter qualify for this
subtraction. The portion of such dividends that may be subtracted
is based upon the portion of taxable income received by the
mutual fund that is derived from federal obligations.
Contact the mutual fund for further information on meeting the
50% asset requirement and computing your allowable subtraction".
I realize this is an old thread, but my search led me here.

The OP is asking about a Treasury Bond fund.

But what about a fund, such as the Target Date Income fund, which has about 30% of its assets in US Government Obligations (2015 data). Would that mean that none of the income from this fund would be subtracted from NY income, because it does not meet the 50% threshold?

I'm not sure this rule was something I was previously aware of, and makes owning balanced funds in taxable accounts in NY a little more tax-inefficient than I had previously assumed. Another point in favor of the a Three-Fund Portfolio over Balanced or Target Date funds if there are (or will be) substantial assets in taxable accounts. Either keep the bonds out of taxable, choose munis, and/or ensure that the choice of bond funds meet the 50% threshold (e.g. the Total Bond Fund has only about 40%).

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grabiner
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Re: Are Treasury Bond Fund dividends taxable in NY?

Post by grabiner » Thu Nov 02, 2017 9:39 pm

neurosphere wrote:
Thu Nov 02, 2017 2:03 pm
The OP is asking about a Treasury Bond fund.

But what about a fund, such as the Target Date Income fund, which has about 30% of its assets in US Government Obligations (2015 data). Would that mean that none of the income from this fund would be subtracted from NY income, because it does not meet the 50% threshold?
This is correct.
I'm not sure this rule was something I was previously aware of, and makes owning balanced funds in taxable accounts in NY a little more tax-inefficient than I had previously assumed. Another point in favor of the a Three-Fund Portfolio over Balanced or Target Date funds if there are (or will be) substantial assets in taxable accounts. Either keep the bonds out of taxable, choose munis, and/or ensure that the choice of bond funds meet the 50% threshold (e.g. the Total Bond Fund has only about 40%).
In NY (and even more so in New York City), if you hold bonds in your taxable account, you probably want to use NY munis or Treasury bonds to avoid the high state taxes. If you don't want all your bonds in NY, you can hold half in NY Long-Term Tax-Exempt and half in Limited-Term Tax-Exempt, so that you have an overall intermediate-term duration and much more than half your income is exempt from NY tax.

The principle is the same in CA, which also has a high state tax, a 50% rule, and Vanguard muni funds.
Wiki David Grabiner

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