I’ve written before about how money market funds are my preferred ‘savings account’. Personally I’ve been using Vanguard’s default money market fund (VMFXX) and their treasury fund (VUSXX). There are similar fund options from all the other major brokerages like Fidelity and Schwab. Other people like to use ETF’s which invest in U.S. Treasuries such as the SGOV fund.
One of the benefits of holding U.S. Treasuries or treasury funds is they are exempt from state and local taxes which are quite high in some areas of the U.S. (There are also municipal bond funds which are exempt from federal taxes; that’s not the focus of this article.)
It’s worth noting – something I hadn’t really focused on until doing my taxes now – that the state tax savings is only realized if you manually request it. By default the systems will just assume all dividends are taxed. You have to verify what percentage of any given fund is state tax exempt and then manually claim the state tax exemption on that income. For example, if you earned $1,000 in dividends from a given fund which was 52% invested in U.S. Treasuries, then you’d claim $520 of income as exempt from state taxes. If you state and local taxes are 10%, you’ll end up with $52 in tax savings.
If you do your own taxes be sure to compute the state tax savings. If you have an accountant, double check that they caught the savings. It’s probably worth mentioning to the accountant when giving over your tax info that some of the dividends are state tax exempt.
Something we noticed now, with regards to Vanguard, is that they strangely don’t mention the breakdown of the U.S. Treasury portion of the default money market fund (VMFXX) in their 1099-DIV tax form: you’ll see there a full long breakdown on each and every stock and bond fund, including what percentage of the fund is invested in U.S. Treasuries. However, for unknown reasons, they don’t list in the 1099 the breakdown of the default money market funds. An astute accountant might know to look for the tax savings for all the other mutual funds and bond funds, but they are very unlikely to realize the state tax exemption from the VMFXX fund unless you mention it directly.
You can find the breakdown in the pdf from Vanguard. For 2023, VMFXX was 49.37% U.S. Treasuries. I found this article from MyMoneyBlog helpful as well.
On a related note, it’s worth pointing out that not all states give the tax break for funds which are invested less than 50% in Treasuries. VMFXX, for example, which is 49% Treasuries would be fully taxed on the state level in those states. Most states allow a proportional deduction even on funds which have are low percentage invested in U.S. Treasuries.
Good article. I will never use an accountant again. The 2x I have, after I took the time to learn about various intricacies in detail myself in future years, I quickly realized how incredibly wrong my returns were completed by both of them for my unique situations and filed amendments accordingly. Both came very highly regarded as well (laughable, in hindsight, really).
Doing your own taxes gives you a much better understanding of the overall tax system and how to optimize your return. The particular aspect discussed here was one I took the time to learn about starting with my 2023CY return, and it’ll surely be in effect for my 2024CY return as well.
This website is also helpful since it provides examples if you use tax software like turbotax or HR block
https://thefinancebuff.com/state-tax-exempt-treasury-fund-etf.html#htoc-treasuries-in-mutual-funds-and-etfs
Anyone know if any tax software automatically enters this info? If TurboTax Premier did this, that might actually be something I’d pay for (vs. Deluxe that I usually use). But I doubt that they do it.
TT does not do it automatically, but it’s very simple to figure out how to input the relevant info on your own.
It’s just annoying when I have 10 different funds for which I need to search on the web to find the percentage that’s exempt from tax. Another annoying thing is the foreign tax credit, where I need to figure out the percentage of dividends that are from foreign sources.
To reduce the hassle, I now try to limit foreign stocks to just one brokerage.
This may not be practical if you don’t want to realize the gain on your positions, but I figured I’d mention it.
Does anyone know of a good list of money market fund ETFs? Or where to find one?
Here is one source:
https://www.investopedia.com/top-money-market-etfs-for-q1-2024-8417180
I like SGOV and FLTR for short-term cash alternatives.
WARNING in CA (and a few others), there’s a minimum threshold percent for treasuries in a fund; otherwise no deduction for you.
Y not just use treasury direct ? They have a separate form box 3
TD is not for holding liquid funds you may want/need to access today.
Treasury Direct is antiquated and low limit/level. Its usefulness is extremely limited
I have my checking account in FDLXX at Fidelity and they autoliquidate it for me when i need money.
Same, and I can select SPAXX as a core fund, which has a decent percentage of state tax exempt assets. So even if things get out of whack, I still get some tax savings. Whether SPAXX is partially deductible depends on your state (e.g. CA and NY require a higher percent than SPAXX offers IIRC).
Thanks for this great article. I didn’t know about this.
PSA: this also applies to treasury ETF’s like SGOV, TFLO, & USFR!
I’ll add a note
Is it just me that the information is a pain to find? I was looking for the percentage for SGOV when filing tax in April. I couldn’t find it on the fund summary page. I ended up finding it by a google result to reddit and a reddit post linked to a PDF.
Same with muni bond and MMKT funds: you have to look up the percentage that is from your state. That part is exempt from state income tax (as are territorial bonds).