Understanding how interest from Vanguard’s VUSXX, a U.S. Treasury Money Market Fund, is treated for state taxes can impact an investor’s tax obligations. State taxation nuances vary widely and influence net returns, making it essential for investors to navigate these complexities to optimize their investment strategy.
Income Classification
VUSXX distributes ordinary dividends, reported on Form 1099-DIV, not Form 1099-INT. For 2024 distributions (reported on 2025 tax forms), Vanguard reports that 100% of VUSXX’s ordinary dividends were derived from U.S. government obligations; many states treat that portion as exempt from state income tax, subject to their own rules and thresholds.1Vanguard. U.S. Government Obligations Income Information
State-Level Exemption Criteria
State tax codes determine whether, and how, dividends attributable to U.S. Treasury securities are exempt from state income tax when received through a mutual fund. For example, California allows a subtraction for dividends from mutual funds to the extent the fund meets a 50% U.S. government‑obligations asset test each quarter and you apply the fund’s stated percentage to your dividends.2Franchise Tax Board (California). 2024 Instructions for Schedule CA (540)
Illinois allows a subtraction for U.S. Treasury interest, including the portion of mutual fund dividends attributable to U.S. government obligations, using the percentage the fund reports if it doesn’t invest exclusively in U.S. obligations.3Illinois Department of Revenue. 2024 IL-1040 Schedule M Instructions
Pennsylvania treats the portion of mutual fund dividends designated as exempt‑interest dividends from U.S. obligations as nontaxable for PA PIT (capital gain distributions remain taxable as dividends).4Pennsylvania Department of Revenue. Dividends
Tax Reporting for Exempt Interest
All VUSXX distributions appear on Form 1099-DIV (Box 1a “Total ordinary dividends”). To determine the amount potentially exempt from your state income tax, multiply your Box 1a amount by the fund’s published percentage of income from U.S. government obligations for the tax year, then follow your state’s specific subtraction rules and any asset‑test requirements.5Vanguard. U.S. Government Obligations Income Information
While the U.S. Treasury‑derived portion may be excluded in many states, how you claim it varies. Some states require that the mutual fund meet a quarterly asset test (for example, California’s 50% rule), whereas others allow a proportional subtraction based on the fund’s reported percentage. Consult your state’s instructions or a tax professional to apply the correct rule in your situation.