State Tax on Treasury Interest (2026): The 31 U.S.C. 3124 Exemption, With Current Yields
Written & reviewed by Hans Goldstein, EA, independent licensed insurance producer · CA license 4273294 · NPN 20602398Admitted to practice before the IRS
Yields checked on treasury.gov and California rates on ftb.ca.gov, September 24, 2026 · Updated
Interest on U.S. Treasury securities is exempt from state and local income tax under 31 U.S.C. 3124; it is still federally taxable. On September 24, 2026 the 1-year Treasury yielded 4.51% and the 5-year 5.03%. For a Californian in the 9.3% bracket, the 1-year equals a 4.97% CD after state tax, above the best 1-year CDs on the market (about 4.35%-4.50%). The exemption matters only in taxable accounts, not IRAs.
Treasury note vs MYGA, after tax
What $100,000 earns in 5 years: treasury note vs MYGA, after tax
Rates used: Treasury note 5.06%, the 5-year Treasury par yield (U.S. Treasury, October 2, 2026); Treasury interest is free of state tax; change it to the rate you are offered. MYGA 5.95%, the best A-rated rate we track as of October 13, 2026: Delaware Life Pinnacle Plus 5-year (AM Best A-, negative outlook, 7/31/2026), $100,000 and up, effective October 6, 2026 (Delaware Life rate sheet).
| Treasury note, interest taxed every year | $121,354 |
|---|---|
| MYGA, tax-deferred, before tax | $133,507 |
| MYGA after paying tax on all the interest at withdrawal | $126,136 |
| Tax deferral alone adds about | $674 |
| MYGA ahead of the treasury note, after tax | $4,781 |
Assumes 22% federal and 0% state income tax, no withdrawals, rates held for the whole term. Treasury interest is free of state tax, so state tax applies to the MYGA only. MYGA interest is taxed as ordinary income when you withdraw it, not as capital gains. Gains taken before age 59 1/2 can owe a 10% IRS penalty, and cashing out early can cost a surrender charge. In an IRA both grow tax-deferred, so the edge there is the rate alone. A MYGA is backed by the issuing insurer's claims-paying ability and your state's guaranty association up to its limits, not the FDIC. General education, not tax, legal or financial advice.
The statute
31 U.S.C. 3124(a): "Stocks and obligations of the United States Government are exempt from taxation by a State or political subdivision of a State." The exemption covers interest on Treasury bills, notes, bonds, TIPS (including the inflation adjustment), STRIPS, floating rate notes and U.S. savings bonds. States may ask you to list the interest, but not to tax it.
For a worked fund example, see is VUSXX tax exempt?.
What it does not cover
- Capital gains from selling a Treasury before maturity.
- Repurchase agreements backed by Treasuries; the fund earns repo income, not Treasury interest.
- Most agency debt: Fannie Mae, Freddie Mac and Ginnie Mae interest is generally state-taxable.
- Funds and ETFs pass through only their U.S.-obligation share, and some states (California among them) require at least 50% of the fund's assets in U.S. obligations at each quarter-end first.
- Retirement accounts: inside an IRA or 401(k) there is no state tax to avoid.
Break-even CD yields at today's Treasury rates
| Treasury | Yield | Break-even CD at 5% state tax | Break-even at 9.3% (CA) | Break-even at 12.3% (CA top) |
|---|---|---|---|---|
| 3-month bill | 4.24% | 4.46% | 4.67% | 4.83% |
| 6-month bill | 4.34% | 4.57% | 4.79% | 4.95% |
| 1-year | 4.51% | 4.75% | 4.97% | 5.14% |
| 2-year | 4.87% | 5.13% | 5.37% | 5.55% |
| 5-year | 5.03% | 5.29% | 5.55% | 5.74% |
Rates expire like milk.
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What the exemption is worth
| State marginal rate | State tax saved per year on $250,000 at the 1-year Treasury's 4.51% |
|---|---|
| 0% (no income tax state) | $0 |
| 5% | $564 |
| 9.3% (California bracket for single filers with $72,724-$371,479 of 2025 taxable income) | $1,049 |
| 12.3% (California top bracket) | $1,387 |
How to claim it
- Find Treasury interest in box 3 of Form 1099-INT (separate from box 1).
- Confirm your state return subtracts it; most tax software does, but check.
- For funds, use the fund company's year-end percentage of income from U.S. government obligations, and check your state's holding threshold.
Treasury funds and ETFs: the 50% rule in California, Connecticut and New York
A Treasury you own outright is exempt in every state. A fund that holds Treasuries is different: its dividends pass the exemption through only if the fund clears your state's test. Three high-tax states use the same one: at least 50% of the fund's assets in qualifying U.S. obligations at the close of each quarter of its tax year. Miss it in any quarter and none of that year's dividends are exempt in those states, even the part that came from Treasuries.
| State | Fund must hold | If it does, you subtract |
|---|---|---|
| California | At least 50% of assets in tax-exempt U.S. obligations (and/or California municipal obligations) | The exempt share of the dividend, as shown on the fund's year-end statement with Form 1099-DIV |
| Connecticut | At least 50% of assets, at the close of each quarter, in obligations Congress bars states from taxing | The exempt dividends, subtracted from federal AGI (Conn. Gen. Stat. 12-701(a)(20)(B)(ii)) |
| New York | The "50% asset requirement each quarter" in U.S. government obligations | The portion of the dividend from U.S. government obligations, on Form IT-225, code S-125 |
Worked example, 2025 tax year. Fund companies publish the U.S.-obligation share of each fund's income after year-end. Per the iShares 2025 U.S. Government Source Income Information, every fund below met the 50%-each-quarter test for 2025:
| Fund (ticker) | 2025 income from U.S. obligations | Excludable part of $5,000 of dividends | California tax saved at 9.3% |
|---|---|---|---|
| iShares 0-3 Month Treasury Bond ETF (SGOV) | 95.14% | $4,757 | $442 |
| iShares Treasury Floating Rate Bond ETF (TFLO) | 99.21% | $4,961 | $461 |
| iShares 0-1 Year Treasury Bond ETF (SHV) | 89.80% | $4,490 | $418 |
| iShares Government Money Market ETF (GMMF) | 56.43% | $2,822 | $262 |
The gap between SGOV and GMMF is the repo point from above in dollars: a government money fund that holds repurchase agreements passes through far less exempt income than a fund that holds bills outright. Use the current year's percentage from your fund's own tax notice; it changes every year.
Treasuries vs a MYGA for five-year money
| $250,000 for 5 years, 24% federal + 9.3% state | Rate | State tax | After-tax value |
|---|---|---|---|
| 5-year Treasury note | 5.03% | Exempt | ~$301,600 |
| 5-year MYGA | 5.80% | Deferred, taxed at withdrawal | ~$304,300 |
The Treasury wins on state tax and daily marketability; the MYGA wins on rate and on deferring both federal and state tax until you withdraw. A MYGA has a surrender charge for early exit and is backed by the insurer and your state guaranty association, not the U.S. government.
Annuity vs CD · Current MYGA rates · Best 5-year MYGA rates
State tax on Treasury interest: FAQ
Is Treasury interest taxed by states?
No. 31 U.S.C. 3124(a) exempts obligations of the United States Government from taxation by a State or political subdivision of a State. Interest on Treasury bills, notes, bonds, TIPS, STRIPS and U.S. savings bonds is federally taxable but exempt from state and local income tax.
Does the exemption cover Treasury money market funds and ETFs?
Only the share of income that comes from direct U.S. government obligations, and only if your state lets it pass through. Repurchase-agreement income generally does not qualify. California, for example, requires a fund to hold at least 50% of its assets in U.S. obligations at the end of each quarter before any of its dividends are exempt. Funds publish the percentage after year-end.
Where does Treasury interest show up on my tax forms?
On Form 1099-INT, box 3, "Interest on U.S. Savings Bonds and Treasury obligations," separate from ordinary bank interest in box 1. Your state return should subtract it; check that your software did.
Are capital gains on Treasuries state-tax exempt?
No. The exemption covers interest. A gain from selling a Treasury before maturity is taxable by your state like any other capital gain.
Are agency bonds exempt from state tax?
It depends on the issuer. Fannie Mae, Freddie Mac and Ginnie Mae interest is generally state-taxable; some agencies, such as the Federal Home Loan Banks and Federal Farm Credit Banks, are exempt by their own statutes. Check the specific bond.
What is the break-even CD yield versus a Treasury?
Treasury yield divided by (1 minus your state tax rate). At California's 9.3% bracket, the 1-year Treasury's 4.51% (September 24, 2026) equals a 4.97% CD, higher than any 1-year CD on the market that day.
Do MYGAs get the state exemption?
No. MYGA interest is not a federal obligation, so it is state-taxable, but only when withdrawn. The MYGA's advantage is deferral of both federal and state tax, plus a higher rate.
When is T-bill interest taxed?
In the year the bill matures or you sell it, not the year you buy it. TreasuryDirect's own example: a 26-week bill bought in October matures the following April, and the interest is reported for the year it matures (TreasuryDirect, Interest Income Reporting for Marketable Treasury Securities). A bill bought in October 2026 that matures in April 2027 is 2027 income. Federal tax applies; state and local tax does not.
How much of SGOV is state-tax exempt?
For 2025, 95.14% of SGOV's income came from U.S. government obligations, and the fund met the 50%-of-assets test at the end of each quarter (iShares 2025 U.S. Government Source Income Information). Multiply your 1099-DIV box 1a dividends by that percentage to get the amount your state may let you subtract. California, Connecticut and New York allow it only because the fund met the 50% quarterly test; check the new percentage each year.
My take
Treasury interest is state-tax-free by federal statute. With the 1-year at 4.51% and the 5-year at 5.03% on September 24, 2026, Treasuries out-yield the best CDs even before the state exemption, which makes the exemption close to decisive for high-tax-state savers in taxable accounts.
Hans Goldstein is an independent licensed insurance producer (CA license 4273294, NPN 20602398). He is not a tax adviser and does not sell Treasury securities. This is general information; confirm your state's rules and your own rate with a tax professional. MYGA figures are illustrations, not quotes.
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Disclosure
This review reflects publicly available Treasury auction results, TreasuryDirect documentation, and approximate market yields as of the date stated above. Treasury yields change daily; current yields differ from prior auctions and may differ from those shown here. This article is general information for educational purposes; it is not a personalized recommendation, solicitation, or offer of any specific security or insurance product. U.S. Treasury securities are backed by the full faith and credit of the United States Government. MYGA references compare Treasury yields against approximate rates from A-rated insurance carriers as of the date stated; carrier rates change monthly. State guaranty fund coverage on annuities is provided by the state insurance department and varies by state (typically $250,000-$300,000 per owner per carrier). Hans Goldstein is an independent licensed insurance producer (NPN 20602398) appointed with multiple A-rated annuity carriers; he is NOT a registered investment advisor, broker-dealer, or registered representative, and is not paid by the U.S. Treasury, TreasuryDirect, or any brokerage for this review. No compensation has been received from any third party in connection with this content. Always read the actual offering documents and consult a licensed advisor before purchasing any security or annuity. Tax discussion of 31 U.S.C. §3124 and Internal Revenue Code provisions reflects law as of 2026 and is subject to change.