Along with my 1099-DIV from Vanguard came a paper on US government obligations. I've received this in the past and didn't pay it any mind. I read it more closely this year, and it appears that some states do not tax income derived from US government obligations. Vanguard lists all their funds that this applies to and the % of dividends deriving from those obligations. They leave it up to the investor to compute how much of their own dividends may be impacted.
I live in Virginia, and found the following information from the VA taxation website:
Va. Code §58.1-322 C provides a subtraction, to the extent included in federal adjusted gross income, for:
1. Interest or dividends on obligations of the United States and on obligations or securities of any authority, commission or instrumentality of the United States to the extent exempt from state income taxes under the laws of the United States including, but not limited to, stocks, bonds, treasury bills, and treasury notes, but not including interest on refunds of federal taxes, interest on equipment purchase contracts, or interest on other normal business transactions.
2. Interest on obligations of this Commonwealth or of any political subdivision or instrumentality of this Commonwealth.
That sounds pretty good, like it might apply to me. Further on I read:
Mutual Funds. The department recognizes that interest or dividends on exempt U.S. or Virginia obligations received by a mutual fund and passed through to the shareholders in qualifying distributions will retain their exempt status in the hands of the mutual fund shareholders. However, as provided in VR 630-2-322, when taxable income in commingled with exempt income, all income is presumed to be taxable unless the portion of income which is exempt from Virginia income tax can be determined with reasonable certainty and substantiated. Thus, distributions from a mutual fund which invests exclusively in U.S. or Virginia obligations are generally exempt for Virginia income tax purposes.
But my mutual funds are not exclusively invested in U.S. obligations. Now what? Further on, that is addressed:
The department's policy is to allow a Virginia subtraction to mutual fund shareholders for the tax exempt portion of their mutual fund dividends as long as such subtraction has been determined in accordance with the information provided by the fund. It is the department's understanding that the general practice in the mutual fund industry is to compute and credit dividends monthly. Accordingly, the department generally requires that funds determine the tax exempt portion of dividends on at least a monthly basis. Although the department will not automatically disallow a taxpayer's subtraction where the mutual fund has not supplied a breakdown of tax-exempt dividends on a monthly basis, the department may examine the fund's records, and where appropriate, make adjustments to the subtractions claimed by the fund's shareholders.
So if Vanguard reported the % monthly, I'd be fine. With an annual %, it looks like I can take my chances.
Claiming this would save me a whole $44. Is it worth trying?
