Interest rates on government money market mutual funds have remained higher in 2023, so for those of you with high cash balances earning dividends, there is an important step this upcoming tax season to pay less taxes on your dividends.
Interest received from Treasury securities like T-Bills, T-Notes, and T-Bonds are exempt from state and local taxes. Government and other Money Market Mutual funds may generate a portion of the dividends paid out to you from these types of Treasury obligations. The reduction in taxable dividends increase your overall rate of return in a taxable account by reducing the amount of taxes you owe. All of the dividends received are reported on 1099-DIV. In order to receive credit for tax exempt dividends you will want to obtain the percentage that the money market fund used treasuries.
During the first part of next year (tax season), fund companies will post the exact percentage within a supplemental tax resource. When that resource becomes available, you will want to provide that information to your tax preparer so that you get credit for your state tax exempt dividends.
Government money market funds and treasury securities can be a great addition to your safety fund and your investments in general, but are not for everyone. There can be reasons for why you would not want to own them, for example - evaluating the use of a tax efficient investment in a tax deferred account.
Fee only financial planning RIA, Bulldog Financial Planning can help you develop investment strategies that account for your individual situation, help you understand your available investments, and how those investments can help you and your family accomplish your financial goals without requiring assets under management.
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