state income tax on VMMXX interest

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blackwhisker
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state income tax on VMMXX interest

Post by blackwhisker » Fri Jan 11, 2019 2:08 pm

a vanguard representative told me only part of the VMMXX is taxable at the state level because VMMXX owns about 30% u.s. treasuries.

that does not sound correct to me. i thought the entire interest from VMMXX is taxable both on the federal and state level. can someone confirm this?

also, is the following article accurate?
https://thefinancebuff.com/which-vangua ... -fund.html

thanks

livesoft
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Re: state income tax on VMMXX interest

Post by livesoft » Fri Jan 11, 2019 2:12 pm

The article cannot be accurate because it is almost 12 years old.

Check your state tax laws to learn about how this interest might be taxed in your state. I can say that VMMXX is 100% state-income-tax-free in my state.
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retiringwhen
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Re: state income tax on VMMXX interest

Post by retiringwhen » Fri Jan 11, 2019 2:15 pm

In 2017, 20.4% of VMMX dividends were derived from US Treasuries. Whether or not that is deductible on your state income taxes is subject to the laws of your state of residence.

I was recently happily corrected by other forum members and learned that I can reduce my VMMXX dividends by that amount in NJ. yeah!

2018 final numbers have not yet been published.

Topic Author
blackwhisker
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Re: state income tax on VMMXX interest

Post by blackwhisker » Fri Jan 11, 2019 2:21 pm

thank you for the replies.

i am the op. i am in california. does anyone know if i have to pay full california state income tax on VMMXX insterest?

retiringwhen
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Re: state income tax on VMMXX interest

Post by retiringwhen » Fri Jan 11, 2019 2:34 pm

This page is your friend....

2017 Government Obligations data for Vanguard funds. (2018 is not out yet)
https://personal.vanguard.com/pdf/USGO_022018.pdf

Bookmark this page and the 2018 data will show up here once it is published:

https://personal.vanguard.com/us/insigh ... ecific-tax

The US Gov't Obligations report is sometimes a bit hidden here, but look around, you will find it.

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Electron
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Re: state income tax on VMMXX interest

Post by Electron » Fri Jan 11, 2019 2:40 pm

Take a look at the instructions for California Schedule CA (540).

"Certain mutual funds pay “exempt-interest dividends.” 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."

The dividends paid by Vanguard Prime Money Market fund would be fully taxable for the state of California.
Electron

Topic Author
blackwhisker
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Re: state income tax on VMMXX interest

Post by blackwhisker » Fri Jan 11, 2019 2:47 pm

Electron wrote:
Fri Jan 11, 2019 2:40 pm
Take a look at the instructions for California Schedule CA (540).

"Certain mutual funds pay “exempt-interest dividends.” 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."

The dividends paid by Vanguard Prime Money Market fund would be fully taxable for the state of California.
Thank you Electron!! i appreciate your help!

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blackwhisker
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Re: state income tax on VMMXX interest

Post by blackwhisker » Fri Jan 11, 2019 2:51 pm

retiringwhen wrote:
Fri Jan 11, 2019 2:34 pm
This page is your friend....

2017 Government Obligations data for Vanguard funds. (2018 is not out yet)
https://personal.vanguard.com/pdf/USGO_022018.pdf

Bookmark this page and the 2018 data will show up here once it is published:

https://personal.vanguard.com/us/insigh ... ecific-tax

The US Gov't Obligations report is sometimes a bit hidden here, but look around, you will find it.
Thank you retiringwhen! i bookmarked the link.

FactualFran
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Re: state income tax on VMMXX interest

Post by FactualFran » Fri Jan 11, 2019 3:53 pm

retiringwhen wrote:
Fri Jan 11, 2019 2:15 pm
In 2017, 20.4% of VMMX dividends were derived from US Treasuries. Whether or not that is deductible on your state income taxes is subject to the laws of your state of residence.

I was recently happily corrected by other forum members and learned that I can reduce my VMMXX dividends by that amount in NJ. yeah!
The correction by the other forum members is questionable.

According to page 2 of the Exempt Obligations New Jersey tax bulletin, the fund must "Have 80% or more of its investments (other than cash or receivables) in obligations that are exempt from New Jersey Income Tax". Also, in the Vanguard U.S. government obligations information for 2017, the line for the Prime Money Market Fund does not include the footnote symbol indicating that "This fund meets the requirements for a New Jersey “qualified investment fund.”" That footnote symbol is on the line for the Treasury Money Market Fund.

retiringwhen
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Re: state income tax on VMMXX interest

Post by retiringwhen » Fri Jan 11, 2019 5:19 pm

FactualFran wrote:
Fri Jan 11, 2019 3:53 pm
retiringwhen wrote:
Fri Jan 11, 2019 2:15 pm
In 2017, 20.4% of VMMX dividends were derived from US Treasuries. Whether or not that is deductible on your state income taxes is subject to the laws of your state of residence.

I was recently happily corrected by other forum members and learned that I can reduce my VMMXX dividends by that amount in NJ. yeah!
The correction by the other forum members is questionable.

According to page 2 of the Exempt Obligations New Jersey tax bulletin, the fund must "Have 80% or more of its investments (other than cash or receivables) in obligations that are exempt from New Jersey Income Tax". Also, in the Vanguard U.S. government obligations information for 2017, the line for the Prime Money Market Fund does not include the footnote symbol indicating that "This fund meets the requirements for a New Jersey “qualified investment fund.”" That footnote symbol is on the line for the Treasury Money Market Fund.
I was of the same opinion as you until that exchange, read the attached topic and see the following legal case.

Topic: viewtopic.php?f=1&t=267698&p=4283317&hi ... 5#p4283317

Legal Case:
It appears the New Jersey mutual fund language is based on this NJ Tax Court decision:

https://scholar.google.com/scholar_case ... s_sdt=4,31

I don't know the proper way to cite these things, but the last section states the following:
X. Holding
For the reasons set out above, it is held that the plain language of 31 U.S.C.A. § 3124 requires that distributions paid by mutual funds be immune from taxation by New Jersey to the extent the distributions are attributable to interest earned on Federal Obligations. The tax imposed under N.J.S.A. 54A:6-14.1, in concert with N.J.S.A. 54A:5-1e or f upon Shareholders of "non-qualified" investment funds is barred by the Federal statute because it sets out conditions for immunity which are inconsistent with the Supremacy Clause.

This holding does not apply to any entity other than a mutual fund which, like the Fund, is designed to function as an investment conduit under I.R.C. §§ 851-855. This holding has no effect on the taxation of dividends paid by traditional C corporations, as the Director feared. Those entities, having the power to accumulate or pay out their earnings, have E & P which may be viewed, under Director's theory, as fungible.
Here is a link to 31 U.S.C.A. § 3124
https://www.law.cornell.edu/uscode/text/31/3124
This is a NJ Tax Court case, so doesn't apply to other states that have set percentage requirements to be exempt.
I will also quote directly from the 2017 1040-NJ Instruction, page 21 for Line 15b.
https://www.state.nj.us/treasury/taxation/pdf/current/1040i.pdf wrote: New Jersey tax-exempt interest income includes interest from:
...
Distributions paid by mutual funds to the extent the distributions are attributable to interest earned on federal obligations.
...

FactualFran
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Re: state income tax on VMMXX interest

Post by FactualFran » Fri Jan 11, 2019 5:48 pm

retiringwhen wrote:
Fri Jan 11, 2019 5:19 pm
I will also quote directly from the 2017 1040-NJ Instruction, page 21 for Line 15b.
https://www.state.nj.us/treasury/taxation/pdf/current/1040i.pdf wrote: New Jersey tax-exempt interest income includes interest from:
...
Distributions paid by mutual funds to the extent the distributions are attributable to interest earned on federal obligations.
...
Also on page 21, a little further down from that quote is the restriction: "A New Jersey Qualified Investment Fund is a regulated investment company in which at least 80% of the fund’s investments (other than cash or receivables) are obligations issued either directly by the federal government or the State of New Jersey or any of its political subdivisions." For 2017 the 80% restriction was in effect. What the instructions for 2018 will be remains to be seen.

I wonder if similar cases will be in the courts of other states that have similar restrictions.

retiringwhen
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Re: state income tax on VMMXX interest

Post by retiringwhen » Fri Jan 11, 2019 6:50 pm

FactualFran wrote:
Fri Jan 11, 2019 5:48 pm
Also on page 21, a little further down from that quote is the restriction: "A New Jersey Qualified Investment Fund is a regulated investment company in which at least 80% of the fund’s investments (other than cash or receivables) are obligations issued either directly by the federal government or the State of New Jersey or any of its political subdivisions." For 2017 the 80% restriction was in effect. What the instructions for 2018 will be remains to be seen.

I wonder if similar cases will be in the courts of other states that have similar restrictions.
The legal case is from 1997, so I don't expect any changes at this late date, realize that the 80% defines rule for being specified as a QIF, not deductibility of a regular mutual fund. That was where I tripped up too. If you have 20% Fed. Obligations, you can deduct 20% of the interest on any mutual fund.

See the following from GIT-5 page 3, it makes things clear that a QIF and a regular mutual fund are different things but their taxability are essentially the same (probably due the fact that the 1997 case overruled the 80% rule.):

Key text is underlined by me....
https://www.state.nj.us/treasury/taxation/pdf/pubs/tgi-ee/git5.pdf wrote:
Mutual Funds

The distributions received by shareholders of regulated investment companies, commonly referred to as “mutual funds,” are subject to New Jersey Income Tax as distributions constituting dividends and/or capital gains, unless the fund is a “qualified investment fund” for New Jersey purposes (see Qualified Investment Funds), or the distributions are attributable to interest earned on federal obligations. (Interest on federal obligations is excludable whether or not such obligations are held by a “qualified investment fund.”) Taxable distributions should be included on Line 16 and/or Line 2, Schedule B, Form NJ‑1040 or Lines 16 and/or 18, Column A, Form NJ‑1040NR. The tax-exempt portion of any distribution is reported on Line 15b, Form NJ‑1040. The nonresident return does not have a line for reporting the tax-exempt portion.

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Re: state income tax on VMMXX interest

Post by grabiner » Fri Jan 11, 2019 10:06 pm

retiringwhen wrote:
Fri Jan 11, 2019 6:50 pm
FactualFran wrote:
Fri Jan 11, 2019 5:48 pm
Also on page 21, a little further down from that quote is the restriction: "A New Jersey Qualified Investment Fund is a regulated investment company in which at least 80% of the fund’s investments (other than cash or receivables) are obligations issued either directly by the federal government or the State of New Jersey or any of its political subdivisions." For 2017 the 80% restriction was in effect. What the instructions for 2018 will be remains to be seen.

I wonder if similar cases will be in the courts of other states that have similar restrictions.
The legal case is from 1997, so I don't expect any changes at this late date, realize that the 80% defines rule for being specified as a QIF, not deductibility of a regular mutual fund. That was where I tripped up too. If you have 20% Fed. Obligations, you can deduct 20% of the interest on any mutual fund.

See the following from GIT-5 page 3, it makes things clear that a QIF and a regular mutual fund are different things but their taxability are essentially the same (probably due the fact that the 1997 case overruled the 80% rule.):
The special rule for a qualified investment fund is that capital gains are also exempt from NJ tax. (This is specific to NJ; most states tax capital gains on Treasury bonds and in-state municipal bonds.) See below:
https://www.state.nj.us/treasury/taxation/pdf/pubs/tgi-ee/git5.pdf wrote:
Mutual Funds

The distributions received by shareholders of regulated investment companies, commonly referred to as “mutual funds,” are subject to New Jersey Income Tax as distributions constituting dividends and/or capital gains, unless the fund is a “qualified investment fund” for New Jersey purposes (see Qualified Investment Funds), or the distributions are attributable to interest earned on federal obligations. (Interest on federal obligations is excludable whether or not such obligations are held by a “qualified investment fund.”) Taxable distributions should be included on Line 16 and/or Line 2, Schedule B, Form NJ‑1040 or Lines 16 and/or 18, Column A, Form NJ‑1040NR. The tax-exempt portion of any distribution is reported on Line 15b, Form NJ‑1040. The nonresident return does not have a line for reporting the tax-exempt portion.
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retiringwhen
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Re: state income tax on VMMXX interest

Post by retiringwhen » Fri Jan 11, 2019 10:11 pm

grabiner wrote:
Fri Jan 11, 2019 10:06 pm
retiringwhen wrote:
Fri Jan 11, 2019 6:50 pm

The legal case is from 1997, so I don't expect any changes at this late date, realize that the 80% defines rule for being specified as a QIF, not deductibility of a regular mutual fund. That was where I tripped up too. If you have 20% Fed. Obligations, you can deduct 20% of the interest on any mutual fund.

See the following from GIT-5 page 3, it makes things clear that a QIF and a regular mutual fund are different things but their taxability are essentially the same (probably due the fact that the 1997 case overruled the 80% rule.):
The special rule for a qualified investment fund is that capital gains are also exempt from NJ tax. (This is specific to NJ; most states tax capital gains on Treasury bonds and in-state municipal bonds.) See below:
https://www.state.nj.us/treasury/taxation/pdf/pubs/tgi-ee/git5.pdf wrote:
Mutual Funds

The distributions received by shareholders of regulated investment companies, commonly referred to as “mutual funds,” are subject to New Jersey Income Tax as distributions constituting dividends and/or capital gains, unless the fund is a “qualified investment fund” for New Jersey purposes (see Qualified Investment Funds), or the distributions are attributable to interest earned on federal obligations. (Interest on federal obligations is excludable whether or not such obligations are held by a “qualified investment fund.”) Taxable distributions should be included on Line 16 and/or Line 2, Schedule B, Form NJ‑1040 or Lines 16 and/or 18, Column A, Form NJ‑1040NR. The tax-exempt portion of any distribution is reported on Line 15b, Form NJ‑1040. The nonresident return does not have a line for reporting the tax-exempt portion.
thanks for the clarification grabiner, that helps make sense. Frankly, the documentation regarding qualified investment funds is so murky, and I have always focused on the dividends portion of the discussion, I missed that distinction. Frankly I couldn't figure out why QIFs existed since they didn't appear to treat dividends any differently, but the CG exemption is a real difference. Doesn't matter for money market funds, but would for bond funds.

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