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Is Treasury Only MM Interest Exempt From State Taxes?
Direct obligations of the US Government are excluded from state/local taxes.
Indirect obligations are NOT exempt. So, excludes are Treasury repos, GSEs (GNMA, Fannie Mae, Freddie Mac, etc).
US Savings Bonds are also NOT exempt.
The difference between Treasury MMF and Treasury-only MMF is that the former rely heavily on Treasury repos - so a bit higher rate but less state tax exemption (that may be fine for low/no tax states).
[Per SC] [T]he Constitution prohibits the states from taxing federal debt. But the prohibition provides blanket relief only for interest on Treasury securities, including savings bonds.
[Per ICI tax attorney] Congress decides when setting up an agency whether its bonds will be state-tax free ...
Aside from Treasury debt, state-tax free bonds include those from agencies such as the Federal Farm Credit Banks, Federal Home Loan Banks, Sallie Mae and the Tennessee Valley Authority. Yet interest on mortgage bonds from Ginnie Mae, Fannie Mae and Freddie Mac is subject to state taxes.
Regarding the original question: Treasury obligations held within MMFs are state exempt, but the fund's income exemption is prorated by the fraction of interest coming from exempt debt. Even Treasury Only MMFs may generate some small amount of state-taxable income. For example, last year (2022) FDLXX was only 93.63% exempt.
Should a "not only" Treasury fund be less than 50% exempt, then a few states will tax 100% of the income. (See '*' footnote in linked Fidelity statement above.)
Comments
Indirect obligations are NOT exempt. So, excludes are Treasury repos, GSEs (GNMA, Fannie Mae, Freddie Mac, etc).
US Savings Bonds are also NOT exempt.The difference between Treasury MMF and Treasury-only MMF is that the former rely heavily on Treasury repos - so a bit higher rate but less state tax exemption (that may be fine for low/no tax states).
www.ncdor.gov/interest-income-us-obligations
tax.illinois.gov/content/dam/soi/en/web/tax/research/publications/pubs/documents/pub-101.pdf
www.irs.gov/taxtopics/tc403
However, I noticed that the Illinois tax publication you referenced states that:
"The following types of income are exempt from Illinois Income Tax:
Interest on U.S. Treasury bonds, notes, bills, certificates, and savings bonds."
Seems like savings bond interest is tax exempt in Illinois. Maybe the exemption for savings bonds varies by state?
Fred
https://www.treasurydirect.gov/savings-bonds/tax-information-ee-i-bonds/
https://www.wsj.com/personal-finance/taxes/bonds-bond-funds-state-taxes-cd066239 See also Raymond James table on which GSEs are exempt:
https://www.raymondjames.com/wealth-management/advice-products-and-services/investment-solutions/fixed-income/taxable-bonds/government-sponsored-enterprise-debt-securities
Regarding the original question: Treasury obligations held within MMFs are state exempt, but the fund's income exemption is prorated by the fraction of interest coming from exempt debt. Even Treasury Only MMFs may generate some small amount of state-taxable income. For example, last year (2022) FDLXX was only 93.63% exempt.
https://www.fidelity.com/bin-public/060_www_fidelity_com/documents/taxes/Revised-GSE-(SA-AA)-Letter.pdf
Should a "not only" Treasury fund be less than 50% exempt, then a few states will tax 100% of the income. (See '*' footnote in linked Fidelity statement above.)