Are Treasury Bills Taxable by States? 50-State Rules (2026)

What federal law says, and what it leaves out

The exemption is federal, so no state needs a rule of its own for a bill you hold. 31 U.S.C. 3124(a) reads that stocks and obligations of the United States Government “are exempt from taxation by a State or political subdivision of a State.” It applies to “each form of taxation that would require the obligation, the interest on the obligation, or both, to be considered in computing a tax,” with two exceptions: a nondiscriminatory franchise tax or similar nonproperty tax imposed on a corporation, and an estate or inheritance tax. For bills specifically, 31 CFR 309.4 says they “shall be exempt from all taxation now or hereafter imposed on the principal or interest thereof by any State,” and that the discount at which a bill is originally sold counts as interest.

Three limits matter in practice:

• It reaches obligations of the United States, not everything that touches them. Arizona's ruling ITR 02-2 notes that the Supreme Court held in Nebraska Department of Revenue v. Loewenstein (513 U.S. 123, 1994) that section 3124(a) does not stop states from taxing interest from repurchase agreements involving U.S. obligations. A government money market fund that holds repos therefore has income that does not qualify.
• Agency paper is split. Vanguard's letter says GNMA, FNMA, Freddie Mac and repurchase agreements are generally subject to state and local taxes; the Georgia booklet, Montana's rule and Indiana's bulletin say so too. Federal Home Loan Banks and Farm Credit Banks, by contrast, are on the exempt side in Vanguard's footnote.
• A bank CD is not a Treasury. The IRS instructions for Form 1099-INT put Treasury bill, note and bond interest in box 3 and bank-deposit interest in box 1. Nothing in section 3124(a) reaches a bank's own obligation (our reading), so CD interest is ordinary interest for state purposes.

Timing is federal too: Publication 550 says you generally report bill interest when the bill is paid at maturity. A bill bought in November 2026 that matures in May 2027 is 2027 income. Federal rates are a separate matter; our pages on capital gains tax on real estate in 2026 and the net investment income tax cover how other federal investment income is taxed.

The nine jurisdictions with no state tax on interest

For residents of these nine there is nothing to subtract. Washington is the one to watch: its Department of Revenue says the state has no individual income tax now, but a new 9.9% tax on adjusted gross income over $1 million applies from January 1, 2028. The page does not say how the new tax will treat Treasury interest; section 3124(a) by its terms covers any tax that requires the interest to be considered (our reading, not a Washington position).

Where the answer changes: Treasury funds

A bill held in your own account has one answer. A fund that holds bills has two layers: the state has to let the exemption pass through the fund, and the fund has to show you how much of its income qualifies. The sources we read sort the 42 taxing jurisdictions into four groups.

1. A fund-level asset test (4 jurisdictions). California's Revenue and Taxation Code 17145(a) tests whether, “at the close of each quarter of its taxable year, at least 50 percent of the value of its total assets consists of obligations” exempt from the state's tax. Connecticut's regulation 12-701(a)(20)-3 defines a qualified fund as one that has at least 50% of total assets “invested in obligations which states are prohibited from taxing by federal law” at each quarter-end. New York's TSB-M-95(4)I says the subtraction “applies only if the fund meets the 50% ‘U.S. Obligations’ asset requirement.” New Jersey's Form IF-1 has the fund certify that it “had not less than 80% of the aggregate principal amount of all its investments” in qualifying obligations, and lists four quarter-end percentages: if one is under 80%, the fund is not a New Jersey qualified investment fund. A fund that fails the test gives its holders no subtraction in that state, even if most of its income came from Treasuries.

2. The exempt share passes through, with no asset test in what we read (25 jurisdictions). Alabama, Arizona, Colorado, Delaware, the District of Columbia, Illinois, Indiana, Iowa, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nebraska, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, Utah, Virginia and Wisconsin. South Carolina's Revenue Ruling 16-2 says in terms that the fund “need not be invested 50 percent or greater in exempt obligations” for pass-through treatment. Maryland's statute says the subtraction includes a mutual fund distribution of interest or dividends attributable to a United States government obligation. Several of these come with paperwork (see the table).

3. The page we read is silent on funds (11 jurisdictions). Arkansas, Georgia, Hawaii, Kansas, Kentucky, Louisiana, Maine, New Mexico, North Carolina, Vermont and West Virginia exempt U.S. obligation interest in the forms, booklets or statutes we saved, but the text we saved does not say how a fund's dividends are handled. That is a gap in our reading, not a finding that they are taxed.

4. Not confirmed (2 jurisdictions). We could not retrieve a state page for Idaho or Mississippi.

One correction to a common belief: older Massachusetts letter rulings from the 1980s and 1990s said that state had no rule exempting a corporate fund's dividends derived from U.S. obligations. A later ruling, Letter Ruling 00-17 (December 19, 2000), quotes the current statute as allowing a deduction for dividends from a fund “to the extent such dividends are attributable to interest on obligations of the United States,” identified in a written notice within 60 days of the fund's year-end. We treat Massachusetts as a pass-through state on that basis.

The 2025 percentages: which funds clear the 50% line

Each year the two largest fund families publish the share of each fund's ordinary dividends that came from U.S. government obligations. The percentage tells you how much to subtract in a pass-through state; the asterisk tells you whether California, Connecticut and New York allow anything. Vanguard's asterisk means the fund meets the threshold; Fidelity's asterisk means it did not. Vanguard's letter describes the test as 50% of the fund's assets at each quarter-end consisting of U.S. government obligations.

The letters do not say why a Fidelity Treasury Money Market Fund at 61.52% falls short while a Vanguard Federal Money Market Fund at 66.61% clears the line, and neither letter says whether any fund meets New Jersey's 80% test. The percentage of dividends and the asset test are different measures: the first is income over a calendar year, the second is assets at four quarter-ends. Funds also publish the numbers only after year-end, so the percentage you subtract in April is last year's.

The rule in every taxing jurisdiction

The table gives, for each of the 42 jurisdictions with a tax on interest, what the source we read says about fund dividends and the document it came from. “Fund rule not in page saved” means the page exempts U.S. obligation interest but the text we saved does not discuss funds. Where a source is older (Alabama 1989, Ohio 1992, Virginia 1994, Rhode Island 1996, Utah 2011, Illinois 2020) check the state's current instructions.

Worked examples (our arithmetic)

A bill versus a CD. Take $250,000 held for one year at an assumed 4.00% simple rate, so $10,000 of interest (the rate is an illustration, not a quote). In Treasury bills the state tax is $0 in every state. If the same $10,000 were bank interest in Pennsylvania, whose flat rate is 3.07% on a page that lists interest among the income it taxes, the state tax would be $307.00; at an assumed 6.00% state rate it would be $600.00. For a half-year bill the interest is $5,000.

A fund, same $10,000 of dividends. Using the 2025 percentages: Vanguard Treasury Money Market Fund (100.00%) leaves $10,000.00 eligible; Fidelity Treasury Only Money Market Fund (98.67%) leaves $9,867.00; Vanguard Federal Money Market Fund (66.61%) leaves $6,661.00; Fidelity Treasury Money Market Fund (61.52%) leaves $6,152.00 in a pass-through state and $0.00 in California, Connecticut or New York for 2025. At an assumed 6.00% state rate, the Fidelity fund's exempt $6,152.00 saves $369.12 and the other $3,848.00 still owes $230.88.

What a reader can do with this

• Separate the two kinds of holding. Bills, notes and bonds in a brokerage or TreasuryDirect account report in box 3 of Form 1099-INT and are subtracted in full. Fund dividends report as ordinary dividends and need the fund's percentage.
• Get the fund's letter and read the asterisk. Vanguard's method is to multiply the ordinary dividends in box 1a of Form 1099-DIV by the percentage in its table; Fidelity gives the same calculation. If you live in California, Connecticut or New York, check that your fund is not on the “did not meet” side.
• If you live in New Jersey, ask the fund. Neither letter reports against the 80% test; Form IF-1 is how a fund certifies it.
• Keep the paperwork your state asks for. Utah wants a fund statement with the percentage and sources, Missouri the year-end statement, Oklahoma the fund's documentation, the District of Columbia a detailed statement.
• Check what the fund holds. Repurchase agreements and agency mortgage securities are generally taxable at the state level, so a “government” fund and a “Treasury only” fund can produce different subtractions on the same dollars.
• Compare before tax first. Our capital-preservation ranking sets real estate notes against a T-bill ladder before tax; this page is the state-tax half of the T-bill side. For cash that sits between investments, see our page on real estate crowdfunding liquidity.
• Moving states. The rules above attach to your state of residence in the tax year; Washington's 2028 tax is the one scheduled change we found.

This is analysis of public documents, not investment, legal or tax advice.

FAQ

Sources, read and saved on October 22, 2026: 31 U.S.C. 3124 and 31 CFR 309.4 (Cornell Legal Information Institute); IRS Publication 550 (2025 returns) and the Instructions for Forms 1099-INT and 1099-OID (Rev. January 2024); the Vanguard U.S. government obligations income letter for 2025 (USGO 012026) and the Fidelity 2025 Percentage of Income from U.S. Government Securities letter; California Revenue and Taxation Code 17145 and Oregon ORS 316.683 (read on public mirrors of the codes because the official sites refused our download); and, for each taxing jurisdiction, the statute, regulation, ruling or revenue department page named in the table (URLs in the CSV; where a state site blocked our download, an Internet Archive copy is noted in the CSV or marked as a third-party copy). Idaho and Mississippi were not confirmed. Percentages, sums and counts are our arithmetic. Fund letters report calendar 2025; the 2026 letters will appear after year-end. This is analysis of public documents and the law, not investment, legal or tax advice.