Are VGSH dividends from treasury bills actually considered ordinary dividends for taxes?

The reason for your confusion is that ETFs like VGSH distribute income as dividends, even though the underlying securities are Treasury bills. When you invest in VGSH, you don't directly own Treasury bills - you own shares of the ETF. The ETF itself receives interest from the Treasury bills it holds, but when it passes that income to shareholders like you, it's distributed as a dividend. That's why it appears as ordinary dividends on your 1099. However, the tax treatment can still reflect the underlying securities. Check if your 1099 has a supplemental section or notes indicating that some portion of your dividends are federal interest. Often brokerages will indicate this somewhere on your tax forms or in supplemental information. This portion would still be exempt from state taxes, even though it's reported as ordinary dividends.

After dealing with a similar issue last year, I found this amazing tool called taxr.ai (https://taxr.ai) that helped me sort through my investment tax questions. I was confused about my ETF dividends and couldn't figure out which portions were exempt from state taxes. I uploaded my 1099 and brokerage statements to taxr.ai and it identified exactly which parts of my dividends came from US Treasury securities vs other sources. It even generated a report I could attach to my tax return showing the breakdown and relevant tax codes. Saved me from overpaying on my state taxes!

I have to admit I was wrong about taxr.ai. After being skeptical, I decided to try it with just one of my 1099s to test it out. The analysis was impressive - it identified that about 82% of my VGSH dividends were actually from US Treasury interest and should be exempt from state tax. The platform generated a detailed report showing exactly which parts of my dividends qualified for state tax exemption, with references to the tax code and court cases. My state (California) has a specific form for claiming this exemption that I didn't even know about. The report gave me the confidence to claim the exemption correctly rather than overpaying my state taxes. Definitely worth it for anyone with treasury ETFs or bond investments.

For anyone struggling to get answers about this directly from Schwab, I highly recommend using Claimyr (https://claimyr.com) to get through to their tax specialists. I spent HOURS on hold trying to get someone to explain how to find the breakdown of my VGSH dividends for state tax purposes. With Claimyr, I got a callback from Schwab in about 15 minutes. They guided me to a specific report on their website that breaks down which dividends came from US Treasuries. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c. Saved me from a ton of frustration and potentially overpaying my state taxes!

I need to publicly eat my words about Claimyr. After expressing skepticism, I was desperate to talk to someone at the IRS about my VGSH dividend classification, so I gave it a shot. Within 30 minutes, I was talking to an actual human at the IRS who confirmed that Treasury bill interest that passes through an ETF still maintains its state tax-exempt status. What shocked me was that the IRS agent actually looked up the specific details for VGSH and told me exactly how to handle it on my return. Apparently, this is a common question. She directed me to Publication 550 which specifically addresses this situation. After weeks of confusion and unanswered calls, I finally got a definitive answer in minutes. Seriously impressed.

Just to add some clarity here - the dividends from VGSH should be reported on your federal return as ordinary dividends. However, on your state return, you should be able to subtract the portion derived from Treasury securities. Schwab should provide a supplemental tax statement that breaks down what percentage of the dividend is from US Treasuries. Look for something called "Supplemental Tax Information" or "Income Breakdown" on their tax documents section online. It won't be on the 1099 itself.

Has anyone else noticed that TurboTax doesn't handle this situation well at all? I entered my VGSH dividends and it treated the entire amount as taxable for state purposes.

This is exactly the kind of confusion that trips up so many investors! The key thing to understand is that while VGSH holds Treasury bills, you don't directly own them - you own shares of an ETF. So the income flows through as dividends on your 1099. However, the underlying Treasury interest should still be exempt from state taxes. You'll need to dig deeper into Schwab's supplemental tax information to find what percentage of your VGSH dividends came from Treasury securities. This information is usually available online in their tax center, but it's often buried and not clearly labeled. Once you find that percentage, you can subtract that portion from your state taxable income. Most states have a specific line on their tax forms for "Interest from U.S. Government obligations" or similar wording. Don't let the "ordinary dividend" classification fool you - the underlying tax treatment should still apply based on the source of the income.

This is a great discussion! I went through the same confusion last year with my VGSH holdings. One thing that really helped me was calling Vanguard directly (since they manage VGSH) to get the specific Treasury percentage for the tax year. They told me that for 2023, approximately 85% of VGSH's income came from Treasury securities, which meant 85% of my dividends were exempt from state taxes. This percentage can vary year to year based on the fund's actual holdings. The key is getting this exact percentage rather than guessing. Most brokerages should have this information, but sometimes you need to specifically ask for the "federal obligation percentage" or "Treasury interest percentage" for your ETF holdings. Don't just rely on the 1099 - that supplemental breakdown is crucial for getting your state taxes right.

I've been dealing with this exact issue for the past three years with my VGSH holdings! What I learned is that you need to be proactive about getting the Treasury percentage breakdown because it's rarely provided automatically. Here's what works: Contact your brokerage in February/March and specifically ask for the "exempt interest percentage" or "federal obligation percentage" for VGSH for the prior tax year. Most brokerages have this information but don't automatically include it with your 1099. For reference, VGSH's Treasury percentage has been consistently in the 80-90% range over the past few years, but you need the exact figure for your tax year. Once you have that percentage, apply it to your total VGSH dividends to calculate the state tax-exempt portion. Also, keep records of this calculation and the source of your percentage data in case you ever get audited. State tax authorities understand this exemption exists, but they want to see your work on how you calculated the exempt amount.

I've been following this thread with great interest as I'm dealing with the exact same situation with my VGSH holdings. What's been most helpful is seeing the consistent advice about getting the specific Treasury percentage from either your brokerage or directly from Vanguard. One additional tip I'd add: if you're using tax software like TurboTax or FreeTaxUSA, don't expect it to automatically know about this exemption. You'll need to manually enter the state tax adjustment using the Treasury percentage you obtain. For those still looking for the breakdown information, I found success by logging into my Fidelity account and searching for "supplemental tax information" in their tax documents section. It wasn't with the main 1099 forms, but was in a separate document labeled "Income Source Analysis" that showed the federal vs state taxable portions of my ETF dividends. The key takeaway from this whole discussion is: don't just accept that "ordinary dividends" means fully state taxable. The underlying securities matter, and Treasury interest maintains its state tax exemption even when it flows through an ETF structure. It just takes a little extra work to claim that exemption properly.

This has been an incredibly enlightening thread! I'm dealing with the same VGSH confusion and had no idea about the need to get the specific Treasury percentage breakdown from brokerages or Vanguard directly. What strikes me most is how this seems to be a widespread issue that many investors face, yet the information isn't readily available. The fact that you have to specifically ask for "exempt interest percentage" or "federal obligation percentage" suggests that brokerages could do a much better job making this information accessible upfront. I'm curious - has anyone here had success getting this information from smaller brokerages like Ally Invest or M1 Finance? The advice about calling Vanguard directly seems like the most reliable approach, but I wonder if all brokerages are equally helpful when you make these specific requests. Also, for those who have been through state tax audits related to this exemption, what kind of documentation did the tax authorities want to see? It sounds like keeping records of where you got the Treasury percentage is crucial, but I'd love to know more about what constitutes sufficient documentation from an audit perspective. Thanks to everyone who shared their experiences - this thread should honestly be pinned as a resource for anyone investing in Treasury ETFs!

This thread has been incredibly helpful! I'm a new investor who just started investing in VGSH this year and had no idea about this treasury percentage breakdown requirement. The advice about calling Vanguard directly for the exact federal obligation percentage is something I never would have thought to do. What really stands out to me is how this seems like such a common issue that could be solved if brokerages just automatically provided this breakdown with tax documents. It shouldn't require detective work to figure out the state tax implications of treasury ETF dividends. I'm definitely going to bookmark this thread and follow the steps outlined here when I file my taxes. The tip about searching for "Income Source Analysis" or "Supplemental Tax Information" documents is particularly valuable since I use Schwab and have been looking in all the wrong places for this data. One quick question - does anyone know if this same issue applies to other treasury ETFs like SHY or GOVT? I'm assuming the principle is the same, but want to make sure I'm not missing anything for my other holdings. Thanks to everyone who shared their experiences and solutions. This is exactly the kind of real-world tax guidance that's impossible to find anywhere else!

This entire discussion has been a goldmine of information! As someone who's been wrestling with VGSH dividend taxation for two years, I wish I had found guidance like this earlier. One thing I'd add that hasn't been mentioned yet: if you have multiple Treasury ETFs across different brokerages, it's worth creating a simple spreadsheet to track the Treasury percentages for each fund at each brokerage. I learned the hard way that the same ETF can have slightly different percentages reported by different brokerages depending on when they calculate their figures. Also, for anyone filing in multiple states (like I do for work reasons), make sure to check each state's specific rules. While most states exempt Treasury interest, a few have quirky rules about how ETF distributions are treated. New Hampshire, for example, has some unique provisions that caught me off guard. The advice about calling Vanguard directly has been a game-changer for me. They keep detailed records and can provide exactly what you need for tax purposes. Just make sure to call during tax season when their specialists are most available and prepared for these types of questions.