Some states do not tax their residents on income that was earned on U.S. government obligations. This includes income from U.S. Treasury bills, notes bonds, and savings bonds. It also includes a percentage of dividends and interest paid by mutual funds, exchange-traded funds, and money market funds which hold U.S. debt obligations.

As a premium service to Comprehensive level clients, we strive to calculate the interest earned on U.S. debt obligations from the funds in their portfolios so that they can adjust their state income tax accordingly.

That being said, only most states exempt taxation from U.S. debt obligations. There are some which either do not have an income tax, do not exempt U.S. debt, or limit the exemption in some way.

To the best of my knowledge in tax year 2021, here is an overview of how the states and jurisdictions handle interest on certain U.S. government obligations.

State	State Abbreviation	Tax-Exempt U.S. Debt Obligations?	Notes
Alabama	AL	Yes	“Income Exempt from Alabama Income Taxation… Interest on obligations of the United States or any of its possessions.” Read more on a guide to Income Exempt from Alabama Income Taxation See Form FTI
Alaska	AK	No	No income tax.
Arizona	AZ	Yes	See 2021 Line 28
Arkansas	AR	Yes	List exempt income on AR4, Part III Guide in Subject 201 and Instructions “Exempt from Income Tax”
California	CA	Limited	“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.” (2021 Schedule CA Instructions )
Colorado	CO	Yes	“Interest or dividend income included in federal taxable income from the following sources is deductible for Colorado purposes. Since Colorado income tax is based on federal taxable income, this income should be subtracted from federal taxable income on the Colorado Form 104. 1.Interest on U.S. Treasury bonds, notes, bills, certificates, and savings bonds.” (source )
Connecticut	CT	Limited	“When Owned by Individuals: Under Conn. Gen. Stat. §12-701(a)(20)(A)(i), any income with respect to which taxation by any state is prohibited by federal law (including interest income received from U.S. government obligations) is, to the extent properly includable in gross income for federal income tax purposes, subtracted from federal adjusted gross income in computing Connecticut adjusted gross income.” (source )
Delaware	DE	Yes	“Interest on obligations of the United States and its territories and possessions, or of any authority, commission or instrumentality of the United States, to the extent includable in gross income for federal income tax purposes, but exempt from state income taxes under the laws of the United States;” (source )
District of Columbia	DC	Yes	“Individuals, estates, and trusts shall not, and shall not have been required to, include interest on the obligations of the District of Columbia, a state, a territory of the United States, or any political subdivision thereof, in the computation of District gross income.” (source )
Florida	FL	No	No income tax.
Georgia	GA	Yes	“There shall be subtracted from taxable income interest or dividends on obligations of the United States and its territories and possessions or of any authority, commission, or instrumentality of the United States to the extent includable in gross income for federal income tax purposes but exempt from state income taxes under the laws of the United States.  Any amount subtracted under this paragraph shall be reduced by any interest expenses directly or indirectly attributable to the production of the interest or dividend income.” (source )
Hawaii	HI	Yes	“There are obligations issued by agencies of the U.S. government which contain language prohibiting the levying of a state tax on the interest paid on these obligations; however, there are obligations issued by other U.S. agencies which do not contain such prohibitive language and, therefore, can be subject to a state tax.” (source )
Idaho	ID	Yes	See 2021 Form 39R Line B3
Illinois	IL	Yes	“If you have income from stocks and obligations of the United States Government that is included in your Illinois base income, you may subtract the total amount of income and obligations from your Illinois base income.” (source )
Indiana	IN	Yes	“If you’ve included any interest from U.S. government obligations on your Indiana tax return, you’re eligible for a deduction.” (source ) See 2020 Schedule 2 Line 4
Iowa	IA	Yes	“Deduct interest received from Federal securities (for example U.S. Savings Bonds, U.S. Treasury Notes)” (source ).
Kansas	KS	Yes	“Enter any interest or dividend income received from obligations or securities of any authority, commission or instrumentality of the United States and its possessions that was included in your federal adjusted gross income.” See 2021 Schedule S Part A10
Kentucky	KY	Yes	“Interest income from United States government obligations upon which states are prohibited by federal law from imposing a tax shall be excluded from gross income when calculating Kentucky income tax liability” (source ).
Louisiana	LA	Yes	“Are interest and dividends from U.S. government obligations exempt from Louisiana income tax? Yes.” (source )
Maine	ME	Yes	TAX STATUS FOR MAINE INCOME TAX OF INTEREST INCOME FROM GOVERNMENT OBLIGATION
Maryland	MD	Yes	“Maryland does not tax interest, dividends, or profit realized from the sale or exchange of United States obligations” (source ).
Massachusetts	MA	Yes	“Additionally, Massachusetts gross income doesn’t include interest on obligations of the United States to the extent such interest is included in federal gross income. These excluded amounts also are reported on Schedule B, Line 1 and subtracted out on Schedule B, Line 6” (source ).
Michigan	MI	Yes	“Michigan taxpayers’ federal incomes are adjusted so that the state does not tax income exempt under 31 USC 3124” (source ).
Minnesota	MN	Yes	“Interest earned on certain U.S. bonds is subject to federal tax but is generally not subject to Minnesota tax” (source ). See 2021 Schedule M1M, Income Additions and Subtractions Line 14
Mississippi	MS	Yes	“31 U.S.C. Section 3124(a) prohibits states from imposing an income tax on interest income from direct obligations of the United States government” (source ).
Missouri	MO	Yes	See Form MO-A Subtractions (2021 Line 8 )
Montana	MT	Yes	“Interest on United States government obligations, as defined in ARM 42.15.204 , and mutual fund dividends attributable to that interest, to the extent included in federal adjusted gross income, are exempt from Montana income tax” (source ).
Nebraska	NE	Yes	“Any interest and dividends received on United States obligations to the extent such interest and dividends are included in federal adjusted gross income but exempt from state income taxes under the laws of the United States shall be subtracted” (source ).
Nevada	NV	No	No income tax.
New Hampshire	NH	No	No income tax.
New Jersey	NJ	Yes	“U.S. Treasury: Interest Exempt” (Nontaxable Investment Income PDF Pages 5-7 )
New Mexico	NM	Yes	“Income from obligations issued by the United States are not includable in net income” (source ).
New York	NY	Limited	“The subtraction modification applies only if the fund meets the 50% ‘U.S. Obligations’ asset requirement under section 612(c) (1) of the Tax Law” (New York Memo TSB-M-95 4i ).
North Carolina	NC	Yes	See D-400 Schedule S (2021 Line 17 )
North Dakota	ND	Yes	“Interest received from obligations of the United States or of its possessions and from this state or its political subdivisions is not subject to income tax imposed by this state” (source ).
Ohio	OH	Yes	“Division (a) of 31 U.S.C. §3124 exempts from state income taxation ‘stocks and obligations of the United States Government’, as well as ‘the interest on the obligation(s)'” (source ).
Oklahoma	OK	Yes	“If you report interest on bonds, notes, and other obligations of the U.S. on your federal return, it may be excluded from your Oklahoma income if a detailed schedule is furnished, accompanied with 1099s showing the amount of interest income and the name of the obligation from which the interest is earned.” See 2021 Form 512 Line 5
Oregon	OR	Yes	“Interest and dividend income on obligations of the federal government which are exempt from state income taxation but not from federal income taxation shall be subtracted from federal taxable income in arriving at Oregon taxable income” (source ).
Pennsylvania	PA	Yes	“Interest is not taxable income if received from direct obligations of the Commonwealth of Pennsylvania, its political subdivisions and authorities or the U.S. government” (source ). See PA Schedule A – Interest Income (2021 Line 7)
Rhode Island	RI	Yes	“Under federal law the State of Rhode Island is precluded from taxing interest received from obligations of the United States” (source ).
South Carolina	SC	Yes	See SC1040 Subtractions (2021 Line 3m )
South Dakota	SD	No	No income tax.
Tennessee	TN	No	No income tax.
Texas	TX	No	No income tax.
Utah	UT	Yes	“Interest earned on U.S. Government obligations is exempt from Utah income tax” (source ). “Claim this subtraction on Utah from TC-40A, Part 2. Use code 71” (source ).
Vermont	VT	Yes	“Interest income from U.S. government obligations, such as U.S. Treasury bonds, bills, and notes, is exempt from Vermont tax under the laws of the United States” (source ).
Virginia	VA	Yes	See Virginia Form 760 Schedule ADJ Subtractions (2021 Line 4 ) More information in our article “How to Deduct U.S. Debt Obligations on State Tax Returns“
Washington	WA	No	No income tax.
West Virginia	WV	Yes	Interest income on obligations of the United States and its possessions to the extent includable in gross income for federal income tax purposes that is exempt from state taxation. W. Va. Code § 11-21-12(c)(1) . (source )
Wisconsin	WI	Yes	“Income from obligations of the United States government and its instrumentalities is not included in income under the income tax law” (source ).
Wyoming	WY	No	No income tax.

 

As always, it is best to confer with a tax professional on matters such as these.

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