I moved some money last year from my Capital one 360 MM to my Vanguard brokerage account into VMFXX. Looking at the tax forms and It looks like the monthly dividends are non qualified. Does this mean that I don’t pay tax on those dividends?

Can some explain how that money is taxed?

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Posted by UltimaParadox

Huntsville

Member since Nov 2008

40873 posts

Posted on 3/7/24 at 8:06 am to LSUSports247

quote:
Does this mean that I don’t pay tax on those dividends?

Opposite actually, since it is non-qualified these dividends will be taxed at your ordinary income levels. Instead of the lower capital gains rate.

I believe the reason why it will never be qualified is because the dividends in this case are just a pass through of the interest being generated. They will never be qualified dividends for tax purposes unless laws change.

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Posted by slackster

Houston

Member since Mar 2009

85109 posts

Posted on 3/7/24 at 8:10 am to LSUSports247

Dividends from a money market fund are non-qualified and taxed as ordinary income at a federal level, but there is likely an exclusion rate in the 1099 information that allows you to avoid state income taxes on some/all of that income.

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Posted by Civildawg

Member since May 2012

8590 posts

Posted on 3/7/24 at 9:26 am to LSUSports247

Yeah I found this out this year as well

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Posted by dgnx6

Baton Rouge

Member since Feb 2006

68857 posts

Posted on 3/7/24 at 3:26 pm to LSUSports247

quote:
Important Note: This fund may earn income from investments in repurchase agreements and certain other securities that are generally subject to state and local taxes.

quote:
Updated January 2024. As the brokerage 1099 forms for 2023 are coming out, here is a quick reminder for those in states with local income taxes. If you earned interest from a money market fund, a significant portion of this interest may have come from US Treasury bills and bonds, which are generally exempt from state and local income taxes. However, in order to claim this exemption, you’ll have to manually enter it on your tax return after digging up a few extra details.

quote:
Let’s take the default cash sweep option for Vanguard brokerage accounts, the Vanguard Federal Money Market Fund (VMFXX), which has an SEC yield of 5.29% as of 1/29/24. Vanguard has recently released the U.S. government obligations income information for 2023 [pdf] for all their funds, which states:

quote:
This tax update provides information to help you properly report your state and local tax liability on ordinary income distributions you received from your mutual fund investments in 2023. On the next pages, you’ll find a list of Vanguard funds that earned a portion of their ordinary dividends from obligations of the U.S. government. Direct U.S. government obligations and certain U.S. government agency obligations are generally exempt from taxation in most states.*

quote:
To find the portion of Vanguard dividends that may be exempt from your state income tax, multiply the amount of “ordinary dividends” reported in Box 1a of your Form 1099-DIV by the percentage listed in the PDF. Note that on the IRS Form 1099-INT, there is a special Line 3 that includes “Interest on US Savings Bonds & Treasury obligations”. However, for the Vanguard funds, they report on 1099-DIV and not 1099-INT. My Vanguard 1099-INT was all zeros.

quote:
For the Vanguard Federal Money Market Fund, this percentage was 49.37% in 2023. Therefore, if you earned $1,000 in total interest from VMFXX in 2023, then $493.70 could possibly be exempt from state and local income taxes.

This post was edited on 3/7/24 at 3:33 pm

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Posted by LSUSports247

Member since Apr 2007

668 posts

Posted on 3/7/24 at 10:55 pm to dgnx6

That is way over my accounting knowledge. I hope turbo tax handles that….

Thanks for the info

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Posted by Oenophile Brah

The Edge of Sanity

Member since Jan 2013

7540 posts

Posted on 3/8/24 at 8:39 am to dgnx6

quote:
dgnx6

Thanks for sharing. Does anyone know if TurboTax makes an adjustment for state reporting? I didn't move most of my savings to VMFXX until August so the total amount is limited. Next year could be a material amount if rates remain high. I don't want to leave a donation to LA coffers if it can be avoided.

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