Taxation of Treasury ETFs

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GibsonL6s
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Taxation of Treasury ETFs

Post by GibsonL6s »

I have been holding SGOV in a taxable account with Schwab and live in California. Does anyone have experience with how Schwab will report the interest at year end. Since Treasuries are exempt from state income tax, I was curious if I need to notify my accountant or the 1099 will be clear. Thanks
sycamore
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Re: Taxation of Treasury ETFs

Post by sycamore »

GibsonL6s wrote: Tue Jun 06, 2023 11:39 am I have been holding SGOV in a taxable account with Schwab and live in California. Does anyone have experience with how Schwab will report the interest at year end. Since Treasuries are exempt from state income tax, I was curious if I need to notify my accountant or the 1099 will be clear. Thanks
No direct experience with Schwab and SGOV, but I have a taxable Schwab account and in 2022 I received dividends from a Vanguard balanced fund that distributed dividends from both stocks and US Government Obligations (USGO).

I can say that you'll get a 1099-DIV. The USGO interest is received as interest by the fund, but you as a fund shareholder receive dividends so you get a 1099-DIV.

The % of income from US Government Obligations is not reported in one of the standard 1099 boxes. Schwab has a "Year End Summary" section later in the 1099 document. In mine there was some useful information about foreign dividends & income, but nothing about the percentage of USGO income. I had to browse the Vanguard tax center to find out how much each of their funds' distributions was USGO. Then I multiplied that percentage by my income from the fund. I entered that number into TurboTax -- there's a specific way to tell it how much of the 1099 income is not taxed by the state.

In other Boglehead posts I've seen people indicate that an accountant may or may not know that interest from USGO is not taxed by states. You know that and I know that, but I wouldn't assume my accountant knows it. It's something the accountant has to tell the tax software to apply.
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GibsonL6s
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Re: Taxation of Treasury ETFs

Post by GibsonL6s »

Thanks, I will remind my accountant. It is clear when you hold Treasuries direct, which makes it easier.
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grabiner
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Re: Taxation of Treasury ETFs

Post by grabiner »

sycamore wrote: Tue Jun 06, 2023 3:18 pm
GibsonL6s wrote: Tue Jun 06, 2023 11:39 am I have been holding SGOV in a taxable account with Schwab and live in California. Does anyone have experience with how Schwab will report the interest at year end. Since Treasuries are exempt from state income tax, I was curious if I need to notify my accountant or the 1099 will be clear. Thanks
No direct experience with Schwab and SGOV, but I have a taxable Schwab account and in 2022 I received dividends from a Vanguard balanced fund that distributed dividends from both stocks and US Government Obligations (USGO).
Note that in CA, the dividends from such a fund are 100% state taxable. Several states, including CA, allow a prorated tax exemption only if a fund has at least 50% of its assets in Treasury bonds.

The dividends from an all-Treasury fund may not be entirely state tax-exempt; sometimes, such a fund will distribute short-term capital gains, which are reported as dividends on the 1099. NJ is the only state I know of which doesn't tax capital gains on Treasury funds.
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dkturner
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Re: Taxation of Treasury ETFs

Post by dkturner »

grabiner wrote: Fri Jun 09, 2023 10:25 pm
sycamore wrote: Tue Jun 06, 2023 3:18 pm
GibsonL6s wrote: Tue Jun 06, 2023 11:39 am I have been holding SGOV in a taxable account with Schwab and live in California. Does anyone have experience with how Schwab will report the interest at year end. Since Treasuries are exempt from state income tax, I was curious if I need to notify my accountant or the 1099 will be clear. Thanks
No direct experience with Schwab and SGOV, but I have a taxable Schwab account and in 2022 I received dividends from a Vanguard balanced fund that distributed dividends from both stocks and US Government Obligations (USGO).
Note that in CA, the dividends from such a fund are 100% state taxable. Several states, including CA, allow a prorated tax exemption only if a fund has at least 50% of its assets in Treasury bonds.

The dividends from an all-Treasury fund may not be entirely state tax-exempt; sometimes, such a fund will distribute short-term capital gains, which are reported as dividends on the 1099. NJ is the only state I know of which doesn't tax capital gains on Treasury funds.
I’m not following you on this one. As I understand it SGOV invests in US treasury bills, which produce interest that is exempt from state income tax. Are us saying that California only exempts (pro rata) interest on US treasury BONDS, not interest from US treasury bills and notes?
sycamore
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Re: Taxation of Treasury ETFs

Post by sycamore »

dkturner wrote: Mon Jun 12, 2023 10:06 am
grabiner wrote: Fri Jun 09, 2023 10:25 pm
sycamore wrote: Tue Jun 06, 2023 3:18 pm
GibsonL6s wrote: Tue Jun 06, 2023 11:39 am I have been holding SGOV in a taxable account with Schwab and live in California. Does anyone have experience with how Schwab will report the interest at year end. Since Treasuries are exempt from state income tax, I was curious if I need to notify my accountant or the 1099 will be clear. Thanks
No direct experience with Schwab and SGOV, but I have a taxable Schwab account and in 2022 I received dividends from a Vanguard balanced fund that distributed dividends from both stocks and US Government Obligations (USGO).
Note that in CA, the dividends from such a fund are 100% state taxable. Several states, including CA, allow a prorated tax exemption only if a fund has at least 50% of its assets in Treasury bonds.

The dividends from an all-Treasury fund may not be entirely state tax-exempt; sometimes, such a fund will distribute short-term capital gains, which are reported as dividends on the 1099. NJ is the only state I know of which doesn't tax capital gains on Treasury funds.
I’m not following you on this one. As I understand it SGOV invests in US treasury bills, which produce interest that is exempt from state income tax. Are us saying that California only exempts (pro rata) interest on US treasury BONDS, not interest from US treasury bills and notes?
I think grabiner was referring to my use of a balanced stock fund, not SGOV.
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grabiner
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Re: Taxation of Treasury ETFs

Post by grabiner »

dkturner wrote: Mon Jun 12, 2023 10:06 am
grabiner wrote: Fri Jun 09, 2023 10:25 pm The dividends from an all-Treasury fund may not be entirely state tax-exempt; sometimes, such a fund will distribute short-term capital gains, which are reported as dividends on the 1099. NJ is the only state I know of which doesn't tax capital gains on Treasury funds.
I’m not following you on this one. As I understand it SGOV invests in US treasury bills, which produce interest that is exempt from state income tax. Are us saying that California only exempts (pro rata) interest on US treasury BONDS, not interest from US treasury bills and notes?
Interest on Treasury bonds, bills, and notes are all tax-exempt, in all states.

However, if a bond fund buys a Treasury bond for $1000, then sells it for $1010 before maturity, the fund has a $10 capital gain. Unless the fund has an offsetting capital loss, it must distribute the capital gain, and the gain is taxed by most states.

And if the gain is short-term (because the bond was held a year or less), it will be reported on the 1099-DIV as a non-qualified dividend, and will be subject to state tax even though the rest of the dividend is tax-exempt. If it is long-term, it will be reported as a capital gain distribution, which is taxed at the lower federal rate but is still subject to state tax.

This shouldn't be a significant issue with SGOV, which buys Treasury bills within three months of maturity, and holds them to maturity. You may have small capital gains or losses when you sell the ETF.

Longer-term Treasury funds will have capital gains; I see that VGSH, VGIT, and VGLT all distributed both short-term and long-term gains in 2020 (when rates fell) and VGSH and VGIT distributed long-term gains in 2021.
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dkturner
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Re: Taxation of Treasury ETFs

Post by dkturner »

sycamore wrote: Mon Jun 12, 2023 12:41 pm
dkturner wrote: Mon Jun 12, 2023 10:06 am
grabiner wrote: Fri Jun 09, 2023 10:25 pm
sycamore wrote: Tue Jun 06, 2023 3:18 pm
GibsonL6s wrote: Tue Jun 06, 2023 11:39 am I have been holding SGOV in a taxable account with Schwab and live in California. Does anyone have experience with how Schwab will report the interest at year end. Since Treasuries are exempt from state income tax, I was curious if I need to notify my accountant or the 1099 will be clear. Thanks
No direct experience with Schwab and SGOV, but I have a taxable Schwab account and in 2022 I received dividends from a Vanguard balanced fund that distributed dividends from both stocks and US Government Obligations (USGO).
Note that in CA, the dividends from such a fund are 100% state taxable. Several states, including CA, allow a prorated tax exemption only if a fund has at least 50% of its assets in Treasury bonds.

The dividends from an all-Treasury fund may not be entirely state tax-exempt; sometimes, such a fund will distribute short-term capital gains, which are reported as dividends on the 1099. NJ is the only state I know of which doesn't tax capital gains on Treasury funds.
I’m not following you on this one. As I understand it SGOV invests in US treasury bills, which produce interest that is exempt from state income tax. Are us saying that California only exempts (pro rata) interest on US treasury BONDS, not interest from US treasury bills and notes?
I think grabiner was referring to my use of a balanced stock fund, not SGOV.
Thanks. I misread the thread and thought he was responding to Gibson’s question.
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