My question involves state taxation of capital gains distributions (CGD) from state-specific muni bond funds, specifically in Ohio and/or New Jersey.
In many (most?) states, CGD from relevant-state muni bond funds are definitely taxable at the state level. However, several states - at least Ohio and New Jersey, maybe others - seem to exempt capital gains from sale of "public obligations" (for the relevant state) from state taxation.***
My question: Does this state-tax exemption on "capital gains on (relevant state) public obligations" extend to capital gains distributions (CGD) from the relevant specific-state municipal bond mutual fund? (e.g. Are CGD from the Vanguard Ohio Long-Term Tax Exempt Fund exempt from taxation on the Ohio state tax return? )
Or does the exemption apply only to sale of an actual relevant state municipal bond, held directly by the tax-payer?
On one hand, frequent-poster grabiner seems to say that CGD from NJ muni bond mutual funds *are* deductible from New Jersey income in this Boglehead's post (bold added by me). viewtopic.php?t=239630#p3748176
Capital gains on a NJ "qualified investment fund" (one which holds NJ tax-exempt investments) are exempt from NJ state tax; this should apply to distributions from the fund as well as capital gains on your own sales. You may need to prorate the gain according to the proportion of the fund which is exempt from NJ state tax. (This rule is specific to NJ; most states do tax capital gains on investments exempt from state tax.)
On the other hand, Turbotax is including the relevant CGD in state taxable income on the state tax form I'm currently working on (Ohio). (i.e. Turbotax either is implying that the Ohio tax exemption doesn't apply to capital gain distributions from Ohio muni-bond mutual funds or Turbotax is wrong. Wouldn't be the first time I've found a Turbotax problem with filling out the Ohio tax return, though.)
On the third hand, my google searches are turning up very close to Zero (just the grabiner post) on this whole topic. Given how much the tax exemption for *interest* from tax-exempt muni-bond funds is discussed, this seems odd, if the CGD exemption really does exist. Or maybe it isn't discussed because the exemption exists in the tax codes of only a small number of states.
Anyone have any insight?
***Ohio: (2018 instructions for IT 1040 Schedule A, Line 16, page 17)
Delving deeper into actual tax code adds no information ... pretty much just a repeat of the above sentence, as far as I can find.You can also deduct any gains resulting from the sale or disposition of Ohio public obligations to the extent that the gain was included in your federal adjusted gross income.
New Jersey: (2018 instructions for NJ-1040, page 11 (pdf) or 9 (printed on page) )
Examples of Exempt (Nontaxable) Income
Interest and capital gains from: (a) Obligations of the State of New Jersey or any of its political subdivisions; /quote]