How do the states generally tax mutual fund distributions?
A. Generally, states treat mutual fund distributions as taxable income, as the federal government does. However, the state may not provide favored tax rates for dividends or long-term capital gains. There are two further areas of different treatment. If your mutual fund invests in U.S. government obligations, states generally exempt from state taxation dividends attributable to federal obligation interest. Another special situation deals with mutual funds that invest in state obligations. Most states do not tax income from their own obligations, whether held directly or through mutual funds. On the other hand, the majority of states do tax income from the obligations of other states. Thus, in most states, you will not pay state tax to the extent you receive, through the fund, income from obligations issued by your state or its municipalities.
Generally, states treat mutual fund distributions as taxable income, as the federal government does. However, the state may not provide favored tax rates for dividends or long-term capital gains. There are two further areas of different treatment. If your mutual fund invests in U.S. government obligations, states generally exempt from state taxation dividends attributable to federal obligation interest. Another special situation deals with mutual funds that invest in state obligations. Most states do not tax income from their own obligations, whether held directly or through mutual funds. On the other hand, the majority of states do tax income from the obligations of other states. Thus, in most states, you will not pay state tax to the extent you receive, through the fund, income from obligations issued by your state or its municipalities.
