Exempt Mutual Funds
How do mutual fund shareholders
determine the amount of income that is from state tax-exempt
government securities?
Interest from certain government and agency securities may
be passed through to mutual funds shareholders and thus
qualify for state income tax exemption.
The exempt portion of the income distribution is equal to the
percentage of mutual fund assets invested in qualifying
securities (See Question 1 above for a listing of
securities).
In New York, California and Connecticut, a tax exemption for
government income earned from a mutual fund is only available
to shareholders if at least 50% of the assets of the fund at
the end of each quarter of the fund's fiscal year were invested
in government securities that are considered tax exempt under
state law.
What is the state income tax
treatment for interest accrual on "stripped" government
securities?
The treatment of the interest accrual on "stripped" bonds
(ETRs, STRIPs, CATs, TIGRs, FICOs) varies by state.
Interest from "stripped" bonds does not necessarily have
the same tax character for state income tax purposes, as would
be the case if the bonds were held directly.
CA, NY, and NJ allow interest from "stripped securities" to be
state income tax-exempt, but not all states follow that
rule.
Interest accrual is taxable on a yearly basis at the
federal level.
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