The state exclusion percentage does not appear on Form 1099-DIV. It’s a state-level figure your brokerage or mutual fund company publishes separately, usually in a supplemental tax statement or year-end tax guide posted to your account each January or February. You apply that percentage to the exempt-interest dividends shown in Box 12 of your 1099-DIV to figure out how much of that income is also free from your state’s income tax.
What Box 12 Actually Reports
Box 12, labeled “Exempt-Interest Dividends,” shows the total tax-exempt dividends you received from a mutual fund or other regulated investment company that holds municipal bonds. This is income excluded from your federal gross income under IRC Section 103, which provides that interest on state and local bonds is generally not included in gross income.1Internal Revenue Service. Instructions for Form 1099-DIV
Box 13, “Specified Private Activity Bond Interest Dividends,” is a subset of Box 12 covering private activity bonds issued after August 7, 1986. That income remains federally exempt for regular tax purposes but counts as a preference item for the Alternative Minimum Tax.1Internal Revenue Service. Instructions for Form 1099-DIV Box 12 is the number you’ll multiply by the exclusion percentage; Box 13 has its own path onto Form 6251, Line 2g.2Internal Revenue Service. Instructions for Form 6251
Why the Percentage Isn’t Printed on the Form
Form 1099-DIV is a federal document, and at the federal level all qualifying municipal bond interest gets the same treatment. The IRS doesn’t care which state issued the bond. Your state does. Most states with an income tax exempt the portion of your muni bond income that came from bonds issued within that state, but tax the portion from out-of-state bonds as ordinary income.3Municipal Securities Rulemaking Board. Municipal Bond Basics
A single national muni fund might hold bonds from dozens of states. There’s no way to print one percentage on the 1099-DIV, because the correct number depends on where the investor lives. A California resident and a New York resident holding the same fund need different figures. So the breakdown goes on a separate document.
Where to Find the Supplemental Statement
Fund companies and brokers publish the state-by-state breakdown online, usually around the same time your 1099-DIV arrives. Vanguard, for example, publishes an annual tax update listing each fund’s percentage of income derived from bonds of each state, and instructs investors to multiply the applicable percentage by their dividends to find the exempt portion.4Vanguard. U.S. Government Obligations Income Information Other firms use similar formats.
Look in your brokerage account’s tax documents section for something labeled “Year-End Tax Guide,” “Tax-Exempt Income by State,” or “Supplemental Tax Information.” If you can’t find it, call your fund company or check their tax center page. The information is almost always posted before paper statements go out.
If you hold a single-state municipal bond fund (say, a fund that only buys New York bonds), the breakdown is simple: virtually 100% of the income qualifies for that state’s exclusion. National muni funds are the ones where the percentage matters, because the money is spread across issuers in many states.
How to Calculate Your State-Exempt Income
Take the dollar amount from Box 12 and multiply it by the percentage your fund company listed for your state. The result is the income you can exclude on your state return.
Say your 1099-DIV shows $10,000 in Box 12, and your fund’s supplemental statement says 75% of the fund’s exempt-interest income came from bonds issued in your state. Multiply $10,000 by 0.75 for $7,500 exempt from your state income tax. The remaining $2,500 is taxable on your state return, because it came from out-of-state bonds your state doesn’t exempt.
If you own shares in multiple funds, run the calculation separately for each one. Each fund holds a different mix of bonds and has its own exclusion percentage for your state. Add up the exempt portions across all funds for your total state exclusion.
U.S. Territory Bonds
IRC Section 103 defines “State” to include the District of Columbia and any U.S. possession.5Office of the Law Revision Counsel. 26 USC 103 – Interest on State and Local Bonds Bonds issued by 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.6Internal Revenue Service. TEB International – U.S. Territories / Possessions Most states also exempt interest from these territory bonds regardless of where the investor lives, which is why they’re often called triple-tax-exempt.
On your fund’s supplemental statement, territory bond income often appears as a separate line that applies universally rather than on a state-by-state basis. Add it to your home-state percentage when calculating the exempt portion.
When the Percentage Doesn’t Matter
Nine states impose no income tax: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming. If you live in one of them, ignore the state breakdown. Box 12 is already federally exempt, and there’s no state tax to worry about.
The exclusion percentage also doesn’t apply if you hold individual municipal bonds directly rather than through a fund. When you buy an individual bond, you already know which state issued it. If it’s your home state, the interest is typically exempt on your state return; if not, it’s taxable. The fund-level percentage exists specifically because mutual funds pool bonds from many states, and investors need a way to untangle the mix.