Yes. VBIL, the Vanguard 0–3 Month Treasury Bill ETF, is state tax exempt: 100% of its ordinary dividends qualify for exemption from state income tax in a taxable brokerage account. Federal law bars states from taxing interest on U.S. government obligations, and because VBIL holds nothing but short-term Treasury bills, the entire dividend gets that protection. You still owe federal tax on the income, and you need to claim the exemption yourself on your state return using a small amount of paperwork.
Why the Full Dividend Qualifies
VBIL invests exclusively in Treasury bills maturing within zero to three months.1Vanguard. Vanguard Introduces New ETFs to Meet Investors Short-Term Liquidity Needs No corporate bonds, no agency debt, no mortgage-backed securities. Every dollar of interest income the fund distributes originates from direct obligations of the U.S. government, so the entire dividend passes through as state tax exempt rather than just a fraction of it. For 2025, Vanguard reported VBIL at 100% U.S. government obligations.2Vanguard. U.S. Government Obligations Income Information for 2025
The exemption is federal statute, not a Vanguard policy. Under 31 U.S.C. § 3124, obligations of the United States government are exempt from taxation by any state or political subdivision.3Office of the Law Revision Counsel. 31 USC 3124 – Exemption From Taxation The rule protects the federal government’s borrowing costs: if states could tax Treasury interest, they would effectively raise the cost of financing the national debt.
Don’t Confuse VBIL With VBILX or BIV
The tickers look almost identical, and this is where most of the confusion starts. VBILX is the Admiral Shares ticker for Vanguard’s Intermediate-Term Bond Index Fund, a different product that holds a mix of Treasuries and investment-grade corporate bonds.4U.S. Securities and Exchange Commission. Vanguard Bond Index Funds Form N-CSR The ETF share class of that fund trades under BIV, not VBIL.
For those funds, only part of the dividend is state tax exempt because corporate bond interest does not qualify. Vanguard reported 51.09% of the Intermediate-Term Bond Index Fund’s ordinary dividends came from U.S. government obligations in 2025, and 49.13% in 2024.2Vanguard. U.S. Government Obligations Income Information for 20255Vanguard. U.S. Government Obligations Income Information for 2024 If you own VBILX or BIV, your treatment is very different from VBIL’s — and it can shift year to year.
States With a 50% Threshold Rule
Most states let the tax-exempt character of Treasury interest pass through from a fund to its shareholders without restriction. You report the exempt portion on your state return, your taxable income drops, and the math for VBIL is straightforward at 100%.
A handful of states add a condition: the fund must hold at least 50% of its assets in qualifying government obligations before any pass-through is allowed. If the fund falls below that floor, none of the Treasury interest passes through as exempt, not even the portion that genuinely came from Treasuries.
VBIL clears the threshold easily at 100%, so this rule never bites for VBIL holders. It is why the VBILX/BIV comparison matters, though. In 2024, that fund’s 49.13% figure sat just under the cutoff, so shareholders in threshold states lost the exemption entirely that year. In 2025 the number crept back above the line. If you hold the sister fund in one of those states, check the percentage every year; a small allocation shift can flip your eligibility.
How to Claim the Exemption on Your State Return
Claiming the exemption takes two documents.
The first is your Form 1099-DIV from Vanguard or your brokerage, which reports total ordinary dividends in Box 1a.6Internal Revenue Service. About Form 1099-DIV, Dividends and Distributions Brokerages generally deliver these by mid-February, though complex accounts sometimes arrive later.
The second is Vanguard’s annual U.S. government obligations report, published on their tax information page.7Vanguard. Tax Information for Vanguard Funds The report lists the percentage of each fund’s ordinary dividends attributable to U.S. government obligations. VBIL’s 2025 percentage was 100%.2Vanguard. U.S. Government Obligations Income Information for 2025
Multiply your Box 1a ordinary dividends by that percentage to get the exempt amount. For VBIL, that means the entire ordinary dividend. Enter the result on the appropriate subtraction line of your state return — most states have a specific line for interest on U.S. obligations. Keep both documents with your records in case your state revenue agency asks for verification.
Federal Tax Still Applies
The state exemption does not extend to your federal return. Interest from Treasury bills is fully taxable as ordinary income at the federal level, and that includes VBIL’s distributions. Bond fund dividends are not qualified dividends, so they don’t get the lower capital gains rates. They’re taxed at your marginal income tax rate, up to 37% for the highest earners.
Capital gains from selling VBIL shares are a separate matter and are not covered by the state Treasury exemption either. That protection applies only to the interest income the fund distributes, not to gains on the share price.
When the Exemption Doesn’t Help You
The state exemption on VBIL’s distributions only saves you money when the fund sits in a taxable brokerage account. Hold VBIL inside a traditional IRA, 401(k), or other tax-deferred account, and the exemption becomes irrelevant: distributions from those accounts are taxed as ordinary income regardless of the original source of the earnings. The same logic applies to Roth accounts for a different reason — qualified Roth withdrawals are already tax-free at both federal and state levels, so there is nothing left to exempt.
And if you live in a state with no income tax, VBIL’s state-exempt status gives you no additional benefit, because there is no state tax to avoid in the first place. Confirm that your account type and state actually let you capture the exemption before picking a fund on that basis.