SNSXX dividends are not fully tax exempt. They are fully taxable at the federal level and treated as ordinary income, but they are almost entirely exempt from state and local income tax. For the 2024 tax year, Schwab reported that 99.99% of the fund’s income came from qualifying U.S. government obligations, so nearly every dollar you earned in SNSXX dividends qualifies for a state tax exclusion in states that impose an income tax.1Schwab Asset Management. 2024 Supplementary Tax Information
Why the State Exemption Applies
SNSXX (Schwab U.S. Treasury Money Fund – Investor Shares) invests almost exclusively in securities backed by the full faith and credit of the U.S. government.2Schwab Asset Management. SNSXX Schwab U.S. Treasury Money Fund – Investor Shares Federal law prohibits states and their political subdivisions from taxing interest on U.S. government obligations, and that protection flows through the fund to shareholders.3Office of the Law Revision Counsel. 31 USC 3124 – Exemption From Taxation The fund’s prospectus confirms that Schwab expects the majority of SNSXX dividends to be exempt from state and local income taxes on this basis.4U.S. Securities and Exchange Commission. Schwab U.S. Treasury Money Fund Summary Prospectus
The small non-qualifying sliver — the difference between 99.99% and 100% — typically comes from repurchase agreements and similar short-term instruments. In a repo, the fund makes a short-term loan collateralized by Treasuries, but the income is interest on the loan itself, not interest paid by the U.S. government. States treat that portion as fully taxable.
The qualifying percentage shifts slightly each year based on the fund’s holdings, so check Schwab’s Supplementary Tax Information document for the current tax year before filing.
Federal Tax on SNSXX Dividends
There is no federal break. The fund’s prospectus states plainly that dividends are subject to federal income tax.4U.S. Securities and Exchange Commission. Schwab U.S. Treasury Money Fund Summary Prospectus Your SNSXX dividends are added to your other ordinary income and taxed at your marginal rate, which ranges from 10% to 37% for 2026.5Internal Revenue Service. Federal Income Tax Rates and Brackets The IRS treats them the same way it treats interest from a savings account or a CD.
If SNSXX dividends push you past what your withholding covers, you may need to make quarterly estimated tax payments to avoid an underpayment penalty. The IRS waives the penalty if you’ve paid at least 90% of your current-year tax liability or 100% of last year’s tax, with that second figure rising to 110% if your prior-year adjusted gross income exceeded $150,000.6Office of the Law Revision Counsel. 26 USC 6654 – Failure by Individual to Pay Estimated Income Tax
The 3.8% Net Investment Income Tax
Higher earners owe an additional 3.8% on top of their regular federal rate. SNSXX dividends count as net investment income under the federal surtax, which kicks in once your modified adjusted gross income crosses a statutory threshold:7Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax
- Single filers: $200,000
- Married filing jointly: $250,000
- Married filing separately: $125,000
These amounts are fixed by statute and not adjusted for inflation. The 3.8% applies to whichever is smaller: your total net investment income, or the amount your MAGI exceeds the threshold. A single filer with $220,000 in MAGI and $15,000 in net investment income pays the surtax on $15,000, because that’s less than the $20,000 excess over $200,000. You calculate this on Form 8960.8Internal Revenue Service. Form 8960 – Net Investment Income Tax
Claiming the State Exemption on Your Return
After the calendar year closes, Schwab sends you Form 1099-DIV. Box 1a shows the total ordinary dividends paid by the fund during the year, and that figure goes on line 3b of Form 1040.9Internal Revenue Service. Form 1099-DIV – Dividends and Distributions10Internal Revenue Service. 1099-DIV Dividend Income If your total ordinary dividends across all investments exceed $1,500, you also complete Schedule B.
The 1099-DIV does not break out the state-exempt portion anywhere on the form. For that, you need Schwab’s Supplementary Tax Information document, which lists the percentage of each fund’s income derived from U.S. government obligations. Schwab posts it in early February on the Schwab Asset Management site under distributions and tax resources.
To find your state-exempt amount, multiply Box 1a by the qualifying percentage. If you received $1,500 in SNSXX dividends and the qualifying percentage is 99.99%, your state-exempt amount is $1,499.85. Most states provide a line on a supplemental additions-and-subtractions schedule where you subtract U.S. government obligation interest from your federal adjusted gross income, which directly reduces your state taxable income. At a 5% state rate, excluding $1,499.85 saves about $75.
Tax preparation software will usually ask whether your mutual fund dividends include U.S. government obligation interest and prompt you for the percentage. Have Schwab’s supplementary document open when you reach that step. Skipping it means overpaying your state on income that is legally exempt, and few states will catch the error and refund the difference on their own.
What the Exemption Doesn’t Cover
The state exemption applies only to state and local personal income tax on the qualifying portion of your dividends. It does not reach franchise taxes on corporations or estate and inheritance taxes, which the statute specifically excludes.3Office of the Law Revision Counsel. 31 USC 3124 – Exemption From Taxation And if you live in one of the nine states with no personal income tax, the exemption changes nothing for you: there is no state tax on the dividends to begin with.