The exclusion percentage is not printed anywhere on Form 1099-DIV. It’s a state-level figure your brokerage or mutual fund company publishes separately, usually in a year-end supplemental tax statement posted to your account in January or February. You apply that percentage to the exempt-interest dividends in Box 12 of your 1099-DIV to work out how much of that income is also free from your state’s income tax.
Why the Percentage Isn’t on the Form
Form 1099-DIV is a federal reporting form, and at the federal level every qualifying municipal bond dividend gets the same treatment under IRC Section 103: excluded from gross income.1Office of the Law Revision Counsel. 26 USC 103 – Interest on State and Local Bonds The IRS doesn’t care which state issued the bond. Your state tax agency usually does. Most states that tax income exempt the share of your municipal bond dividends tied to bonds issued inside the state, and tax the rest as ordinary income.2Municipal Securities Rulemaking Board. Municipal Bond Basics
A single national muni fund can hold bonds from dozens of states. No single percentage would be correct for every shareholder: a California resident and a New York resident holding the same fund need different numbers. So the fund publishes the full state-by-state breakdown separately and lets you pull the line that applies to you.
Where to Find the Supplemental Statement
Look in your brokerage account’s tax documents section for something called a “Year-End Tax Guide,” “Tax-Exempt Income by State,” or “Supplemental Tax Information.” Vanguard, for example, publishes a tax update listing each fund’s percentage of income derived from bonds of each state, and tells investors to multiply their dividends by the applicable percentage to figure the exempt portion.3Vanguard. U.S. Government Obligations Income Information Other firms use similar formats and timing.
These documents typically go online around the same time your 1099-DIV is issued, often before any paper copies arrive. If you can’t find yours, call the fund company or check the firm’s tax center page directly.
How to Apply the Percentage
Start with the dollar amount in Box 12 of your 1099-DIV, which shows your total exempt-interest dividends from the fund.4Internal Revenue Service. Instructions for Form 1099-DIV Multiply that figure by the percentage listed for your state on the fund’s supplemental statement. The result is the portion you can exclude on your state return. The remainder is taxable at the state level because it came from out-of-state bonds.
A quick example. Your 1099-DIV shows $10,000 in Box 12. The fund’s supplemental statement says 75% of its exempt-interest income came from bonds issued in your state. Multiply $10,000 by 0.75 for $7,500 exempt from state tax. The remaining $2,500 goes on your state return as taxable income.
Own shares in more than one fund? Run the calculation separately for each one. Every fund has a different bond mix and its own percentage for your state. Add the exempt portions together for your total state exclusion.
When You Can Skip This Entirely
Nine states don’t tax income at all: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. If you live in one of them, the state breakdown doesn’t matter. Your Box 12 income is federally exempt and your state isn’t taxing it either.
The percentage also doesn’t apply if you hold individual municipal bonds directly rather than through a fund. You already know which state issued the bond you bought, so the state treatment follows automatically. The fund-level percentage exists because mutual funds blend bonds from many states into one pool.
If you own a single-state municipal bond fund, say one that holds only New York bonds, the breakdown is trivial. Essentially 100% of the income qualifies for that state’s exclusion, and the supplemental statement will confirm it.
A Note on Territory Bonds
Section 103 defines “State” to include the District of Columbia and any U.S. possession, so bonds from Puerto Rico, Guam, the U.S. Virgin Islands, American Samoa, and the Northern Mariana Islands are treated the same as state-issued bonds for federal purposes.1Office of the Law Revision Counsel. 26 USC 103 – Interest on State and Local Bonds5Internal Revenue Service. TEB International – U.S. Territories / Possessions Most states also exempt interest from these territory bonds regardless of where the investor lives. On your fund’s supplemental statement, territory bond income may appear on a separate line that applies universally rather than state-by-state, which can raise your effective exempt percentage.