U.S. Treasury Obligation State Tax Exemption
- Olivia Allen
- Mar 26
- 8 min read
TL;DR — Too Long; Didn’t Read
If your clients hold funds like SNSXX, SGUXX, IEF, IEI, SCHP, SCHO, SCHR, or SCHQ in taxable accounts, a portion of their dividend income may be exempt from state income tax — but it won’t show up on their 1099. Schwab doesn’t break it out. You have to find it, calculate it, and give it to their tax preparer — or at the very least, make them aware. This guide tells you exactly how.
Understanding the Gap
Many mutual funds and ETFs hold U.S. Treasury obligations as part of their portfolio. The income these funds distribute to shareholders is fully taxable at the federal level — but in most states, the portion of that income derived from U.S. government obligations is exempt from state income tax.
The problem is that this exemption does not appear on the 1099. The line item for “Interest on U.S. Savings Bonds and Treasury Obligations” shows $0 for these funds because they are funds holding Treasuries, not direct Treasury bonds. The pass-through exemption requires a separate calculation using supplemental data that fund companies publish each year.
Which custodians break this out on the 1099?
This is not an industry-wide gap — it is specific to the custodians fee-only RIAs tend to use. Schwab is the primary outlier. Their Supplemental Tax Information document is published at schwabassetmanagement.com each year, typically in early February.
Qualifying Funds to Watch
The following funds are commonly held in client portfolios and have meaningful U.S. government obligation percentages. This is not an exhaustive list — refer to the Schwab Supplemental Tax Information document and equivalent reports from BlackRock, Vanguard, and others for a complete listing each year.
• SWRSX — Schwab Treasury Inflation Protected Securities Index Fund — 100.00%
• SNSXX / SUTXX — Schwab U.S. Treasury Money Market Fund — 99.99%
• SCHP — Schwab U.S. TIPS ETF — 100.00%
• SCHO — Schwab Short-Term U.S. Treasury ETF — 100.00%
• SCHR — Schwab Intermediate-Term U.S. Treasury ETF — 100.00%
• SCHQ — Schwab Long-Term U.S. Treasury ETF — 100.00%
• SWSBX — Schwab Short-Term Bond Index Fund — 67.97%
• SWAGX — Schwab U.S. Aggregate Bond Index Fund — 44.06%
• SWGXX / SNVXX / SGUXX — Schwab Government Money Fund — 36.20%
• SGVT — Schwab Government Money Market ETF — 36.66%
• SCHZ — Schwab U.S. Aggregate Bond ETF — 44.18%
• IEF — iShares 7-10 Year Treasury Bond ETF — ~100%
• IEI — iShares 3-7 Year Treasury Bond ETF — ~100%
• SGOV — iShares 0-3 Month Treasury Bond ETF — ~100%
Percentages are from the 2025 Schwab Supplemental Tax Information document. iShares percentages are approximate — confirm with BlackRock’s supplemental report for exact figures. Percentages change annually.
How to Pull the Schwab Positions Report
The first step in identifying impacted accounts is exporting the firm-wide positions report from Schwab Advisor Center. Upon request, Village will grant you access to our screening tool. Follow these steps:
Important Limitation
The Schwab firm-wide positions export described in this guide reflects current holdings only. Accounts that held a qualifying fund during the year and sold out before year-end will not appear. Advisors should cross-reference transaction history to catch any liquidated positions before concluding the review.
Step 1: Export the Positions Report
1. Log in to Schwab Advisor Center and navigate to the Positions tab.
2. Select the firm level or master account level view, depending on how your firm is set up.
3. Switch to the Securities view.
4. Export the entire list. This will be uploaded into the Village screening tool to generate a PDF showing all impacted positions.
Step 2: Export the Account Level Positions Report
5. Navigate to the Accounts level in Schwab Advisor Center and export the positions data.
6. Open the exported spreadsheet. Add a new column with this formula to truncate account numbers to the last 4 digits only — do not upload full account numbers:
=RIGHT(A9, 4) — where A9 is the first cell containing account numbers. Drag the formula down to apply to all rows.
7. Highlight the new column, copy it, and Paste as Values Only to remove the formula.
8. Delete the original column containing full account numbers.
9. Save the file and upload into the Village screening tool when prompted. The tool will hide rows that do not contain qualifying tickers and filter out retirement accounts, leaving only taxable accounts with impacted positions.
Step 3: Review the Output
10. The tool generates a filtered spreadsheet formatted as a sortable, filterable table.
11. Download the output and share with your advisor for review.
12. Identify which households to prioritize for further review.
Pulling the 1099s
Once impacted households are identified, you’ll need the 1099 for each account to obtain the actual income figures. While Schwab does offer a bulk 1099 export, it is very difficult to cherry-pick only impacted accounts, so 1099s typically need to be downloaded individually per account.
1. In Schwab Advisor Center, navigate to each identified client account.
2. Download the 1099-DIV for the applicable tax year.
3. Note the Box 1a (Total Ordinary Dividends) amount for each qualifying fund held in the account.
4. Upload the 1099s into your chosen analysis tool (Fin Pods AI or MFPCO) for calculation.
Time Saving Tip
For firms with large numbers of impacted accounts, prioritize by balance size first. Accounts with larger positions in qualifying funds will generate the most meaningful state tax savings. Smaller accounts can be assessed in subsequent years once a workflow is established.
Tools for Analysis
Two tools have been validated by the RIA community for calculating state tax exemption amounts. Both serve slightly different purposes — for high-volume users, using both is recommended.
Pricing: $50/month or ~$600/year (2 months free on annual)
Data Input: Upload 1099 directly — AI extracts data automatically
Fund Database: ~5,000 funds; growing based on demand
Bulk Upload: Yes — 50+ 1099s at once; bulk export enhancement coming
Output: PDF + Excel work papers with source page citations
Security: SOC 2 Type 2, AWS-only, no external AI/LLMs, burn-after-read, zero-access sharing, post-quantum secure
Best for: High volume firms, compliance-conscious workflows, audit-ready documentation
Pricing: $150/yr (single user) | $290 (2–5 users) | $430 (6–10) | $570 (11–25) | $710 (26–50) | $850 (51–100)
Data Input: Manual entry of income figures from 1099; ticker lookup now supported
Fund Database: Broader database; industry veteran with deep fund coverage
What It Covers: Direct + indirect federal obligations, state muni percentages, AMT, Corporate DRD, foreign income
Best for: Comprehensive fund coverage, lower volume, budget-conscious firms
Disclosure: Village Financial Services has no financial relationship with either tool and receives no compensation for referrals. These tools were identified through community research and direct evaluation.
Annual CRM Workflow Template
The following task sequence is designed to be added to your CRM (Advyzon, Slant, Wealthbox, etc.) as a recurring annual workflow. Village Fractional CSAs can add this workflow to your CRM on your behalf.
1. Early February — CSA: Pull Schwab firm-wide positions export and run through screening tool to identify accounts with qualifying funds in taxable accounts.
2. Early February — Advisor / CSA: Cross-reference transaction history for accounts that held qualifying funds and sold out during the year (not captured in positions export).
3. Mid February — CSA: Share filtered positions report with advisor for household prioritization.
4. Early February — CSA: Confirm Schwab Supplemental Tax Information document has been published and save to firm file.
5. Mid–Late February — CSA: Pull 1099s for prioritized households from Schwab Advisor Center (manual, per account).
6. Late February — Advisor / CSA: Upload 1099s into Fin Pods AI and/or MFPCO for calculation; download work papers.
7. Late February – March 15 — Advisor: Prepare client communication using tax letter template; attach supplemental document and work paper as backup for tax preparer.
8. By March 15 — Advisor: Send to client and CPA/tax preparer; educate preparer if unfamiliar with the exemption.
9. Upon Completion — Advisor / CSA: Note in client file which funds were reviewed, income amounts, and state exemption calculated. Flag for following year.
10. Q4 / Annual Review — Advisor: Review fund selection annually — consider higher-Treasury-obligation funds or lower-expense alternatives.
How Village Can Help
Village Financial Services partners with independent RIA firms exclusively custodying at Schwab and Altruist to remove administrative burden and build repeatable, scalable processes. Here is what we can do for your firm on this specific workflow:
Pull the Schwab firm-wide positions export and run it through our screening tool to identify impacted accounts — at your request, at no additional charge for current Fractional CSA clients
Manually pull 1099s for prioritized households upon advisor direction
Add the annual CRM workflow template from this guide into your CRM on your behalf
Assist with client communication preparation using the email templates included in our white paper
Help evaluate and onboard Fin Pods AI or MFPCO for your practice
Frequently Asked Questions
Why doesn’t the 1099 just show this deduction automatically?
Because the funds in question are not direct holders of Treasury bonds — they are funds that hold Treasuries as part of their portfolio. The IRS requires direct interest income from Treasuries to be reported, but the pass-through treatment from fund-level holdings requires separate disclosure. Custodians like Altruist, Vanguard, and the large broker-dealers have chosen to include this calculation in the 1099 as a service to clients. Schwab and Fidelity publish supplemental documents instead, leaving the calculation to advisors and tax preparers.
Does this apply to all states?
Most states exempt U.S. government obligation income from state income tax, but there are exceptions. A handful of states — including California, Connecticut, and New York — have minimum investment thresholds that funds must meet before the exemption passes through to shareholders (noted with an asterisk in the Schwab Supplemental Tax document). States with no income tax (Florida, Texas, etc.) don’t benefit from this deduction. Always confirm the rules for your client’s specific state of residence.
What if my client’s tax preparer isn’t familiar with this deduction?
This is one of the most common friction points. Even with the right documentation, advisors sometimes have to educate the CPA before the deduction makes it onto the return. The work papers generated by Fin Pods AI include source page references from the fund company’s supplemental document, giving the tax preparer independently verifiable proof. Attaching the supplemental document alongside the work paper is the strongest handoff you can make.
Is it worth going back and amending prior year returns?
It depends on the dollar amount of the potential savings and the cost to amend. For clients with meaningful positions in high-Treasury-obligation funds, the savings can be significant — we’ve seen examples of $3,000–$6,000 in annual state tax savings per household. In those cases, amendments for open tax years (generally 3 years back) are worth pursuing. For smaller savings amounts, the cost of amending through a third-party tax preparer may not be justified. Prioritize clients with the largest positions first.
We custody at Altruist — do I still need to do this?
Good news: we've confirmed that Altruist does include the U.S. government obligation breakdown directly on the 1099, similar to how Vanguard presents it. The information is already in front of the client and their tax preparer — the advisor’s role shifts from calculating it to making sure the tax preparer is aware of it and applying it correctly.
The positions export only shows current holdings — what about clients who sold a qualifying fund mid-year?
This is a real limitation. If a client held SGUXX for 8 months and sold out before year-end, they still earned income from that fund during the year that may qualify for the state exemption — but they won’t appear on the positions export. Cross-reference transaction history for the year, particularly for accounts where changes were made to qualifying positions. This step should be built explicitly into your annual CRM workflow.
Can my Village FCSA handle this process for me?
Yes — with some important caveats. Village can pull the Schwab firm-wide positions export, run it through our screening tool, and share the output with you for review. We can also pull 1099s for prioritized households upon your direction and add the annual CRM workflow template to your CRM on your behalf. Any calculations will need to be completed by you or your team using Fin Pods AI and/or MFPCO — that is outside our scope as a Fractional CSA. To get started, click the link on our Fractional CSA page.
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