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.

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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.

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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.