The U.S. government obligations percentage on your fund’s tax letter
One percentage per fund, published after year end, decides how much of your money fund dividend your state can tax.
Compiled by Radif Partners · Editorial policy
Every January or February, money fund companies publish a short table that most shareholders never open: for each fund, the percentage of the year’s ordinary dividends that came from obligations of the United States. That figure is what a state return needs. Federal law forbids states to tax interest on U.S. obligations, so the part of a fund dividend earned on Treasuries and on a few agencies’ debt can be subtracted from state income. Form 1099-DIV does not show it: the 1099 reports the total dividend, and the subtraction has to be worked out from the company’s supplement. The figure is often lower than investors expect. For 2024, Vanguard reported 59.87% for Vanguard Federal (VMFXX), 63.61% for Vanguard Cash Reserves Federal (VMRXX) and 100% for Vanguard Treasury (VUSXX). The rest of each dividend, from repurchase agreements and other holdings, was taxable by states. On $3,000 of dividends from VMFXX, the subtraction would be about $1,796; at a 9.3% state rate, that saves about $167 of tax.
What the tax letter percentage is worth
Example, not your result yet· change a figure to see yours
Amount to subtract on your state return
$1,197
| State tax saved | $111 |
| Dividends still taxed by the state | $803 |
In California, Connecticut and New York only if the fund met the 50% test for the year; the letter usually says so.
What the percentage measures
The letter percentage is a ratio of income, not of assets. It divides the fund’s income from qualifying obligations during the year by its total distributable income. Two things make it differ from a snapshot of holdings. First, the mix changes: a fund can hold more repo in one quarter and more bills in another. Second, different holdings earn different rates: if repo paid more than bills during the year, repo’s share of income is larger than its share of assets. The holdings estimate this site computes from the latest Form N-MFP report is therefore an approximation, useful to compare funds before the year ends and to spot funds with very little exempt income. It is not a figure to put on a return.
The gap can be wide. At the end of the latest reported month, VMFXX held about 74% of its portfolio in Treasuries and exempt agency debt, against 59.87% of income in the 2024 letter; VMRXX held about 73%, against 63.61%; VUSXX held 100%, matching its 100%. The holdings breakdown of VMFXX was:
| Holding | Share of portfolio |
|---|---|
| Treasury bills and notes | 38.7% |
| Debt of the Federal Home Loan Banks, Farm Credit Banks and Tennessee Valley Authority | 34.8% |
| Repo (short loans to banks and dealers) backed by Treasuries | 26.1% |
| Fannie Mae, Freddie Mac and other agency debt | 0.4% |
How each state uses it
In California, Connecticut and New York, the percentage applies only if the fund held at least 50% of its assets in qualifying obligations at the close of each quarter; fund companies usually say on the same page whether that was the case. In California the subtraction goes on Schedule CA (540); in New York on the line of Form IT-201 for interest income on U.S. government bonds. New Jersey applies the percentage without a threshold for federal obligations, according to its GIT-5 publication, and has a separate rule for qualified investment funds holding 80% or more in New Jersey-exempt obligations. Pennsylvania and Illinois apply it without a threshold. Illinois Publication 101 lists which federal agencies’ interest qualifies and confirms that repo income does not. A few states, and the treatment of some agencies, differ; the instructions of your own state’s return are the authority.
The difference this makes is easy to underestimate. Take a single Californian with $120,000 of taxable income and $50,000 in VMFXX. Using the holdings estimate, the calculator gives 2.85% after federal and California tax. Entering the 2024 letter figure of 59.87% instead gives 2.80%, a difference of $25 a year. Every calculator on this site has a field for the letter percentage under “Have the fund’s year-end tax statement?”; enter it once the company has published it.
Practical points
The percentage applies to ordinary dividends from the fund, not to capital gains distributions, which money funds rarely pay. If you held the fund for only part of the year, most companies still publish one percentage for the whole year, and that is what you apply. If you hold several funds, each has its own percentage. If you hold the fund through a brokerage that is not the fund company, the brokerage’s tax package may reprint the table or link to it. And if the fund failed the 50% test in your state, the percentage is published anyway; it simply cannot be used in California, Connecticut or New York for that year.
The letters for 2026 will be published early in 2027. Until then, the holdings estimate and the quarter-end test on each fund page are the best guide to what the letter will say: a fund whose Treasury and exempt agency share stayed far above 50% all year is likely to qualify, and one that sat below it is likely not to.