Are T-bills taxed by states?

By StateYield · Published Oct 21, 2026 · Updated Oct 21, 2026

Short answer: no. Interest on Treasury bills you own directly is exempt from state and local income tax. It is still subject to federal income tax. That single difference is why a T-bill can out-earn a higher-yielding bank account in a high-tax state.

What the law says

The exemption comes from federal law, not from each state's generosity. 31 U.S.C. § 3124(a) says that "stocks and obligations of the United States Government are exempt from taxation by a State or political subdivision of a State," and that the exemption applies to each form of taxation that would require the obligation or its interest "to be considered in computing a tax." Because "political subdivision" covers cities and counties, the protection reaches local income taxes too.

The statute lists two exceptions: a nondiscriminatory franchise tax (or a similar non-property tax in place of one) imposed on a corporation, and estate or inheritance taxes. Neither applies to an individual's state personal income tax. A company holding T-bills can be in a different position, which this guide doesn't cover.

The IRS describes the same rule from the federal side. Publication 550 and Tax Topic 403 both say interest from Treasury bills, notes and bonds "is subject to federal income tax but is exempt from all state and local income taxes." TreasuryDirect's Treasury bill page sums up the tax line as "Federal tax due on interest earned. No state or local taxes."

How T-bill interest is taxed federally

A bill doesn't pay a coupon. You buy it at a discount (or at face value) and receive face value at maturity; the difference is your interest. Per Publication 550 you generally report that interest when the bill is paid at maturity. TreasuryDirect flags a common surprise: interest is reportable in the year you sell the bill or it matures, "which is not necessarily the year you bought it." A 26-week bill bought in October matures the following April, so its interest goes on the next year's return.

Treasury interest is reported on Form 1099-INT in box 3, "Interest on U.S. Savings Bonds and Treasury Obligations," separately from bank interest in box 1 (IRS instructions). That separation is what lets you or your tax software carry the amount to your state's subtraction line. New York, for example, subtracts "interest income on obligations of the United States" from federal adjusted gross income under Tax Law § 612(c)(1). Other states have their own line, so check your state's return instructions.

What the exemption is worth right now

An easy way to see the value is the taxable-equivalent yield: what a fully state-taxable investment, such as a savings account, would need to pay to match the T-bill after state tax. Federal tax hits both, so it drops out of the comparison. The formula is T-bill yield ÷ (1 − state rate).

The latest 13-week bill auction (Oct 19, 2026) produced an investment rate of 4.195%. Here is what a fully taxable account would need to pay to match it, at each state's top rate and at the rate that applies to a single filer with $100,000 of taxable income:

Live figures as of Oct 21, 2026, 5:25 PM CT; each yield carries its own source date. State brackets: Tax Foundation 2026 (single filer). Local income taxes are not included; where they apply, the advantage is larger.

In a state without an income tax the exemption is worth nothing, so a T-bill wins there only if its yield is simply higher. In a high-tax state the gap is real: at California's top rate, a savings account would need about 4.84% to match the bill.

Two refinements matter for some readers. Use your own marginal rate rather than the top rate; most people are in a lower bracket, which shrinks the advantage. And if you itemize and haven't reached the federal cap on deducting state and local taxes, part of any state tax you pay comes back as a federal deduction, which narrows the gap a little. Our tables ignore that interaction.

What the exemption does not cover

• Funds that hold T-bills. A T-bill ETF or Treasury money market fund pays you dividends from a fund, not interest on a Treasury obligation. Whether those dividends are state-exempt depends on your state's rules and on how much of the fund's income came from U.S. government obligations. New York, Connecticut and California add a 50% asset test on top. See ETFs vs money funds after state tax and the 50% rule.
• Repurchase agreements and agency debt. Government money funds often hold these. Vanguard's 2025 tax supplement notes that GNMA, FNMA, Freddie Mac and repurchase agreements, "including those that involve U.S. government obligations," are "generally subject to state and local taxes."
• Bank deposits. Savings, CD and bank-sweep interest isn't interest on a U.S. obligation, so § 3124 doesn't apply. It is federally taxable (Topic 403), and states that tax interest income generally tax it.

Buying T-bills directly

You can buy bills at auction in TreasuryDirect (non-competitive bids, $100 minimum and $100 increments) or through a bank or broker, which can also buy them after the auction on the secondary market. Either way, what you earn is Treasury interest. Our guide to how bill auctions work explains the results, and the home page shows this week's auctions.

Sources

1. 31 U.S.C. § 3124, Exemption from taxation (Cornell LII)
2. IRS Publication 550 (2025), Investment Income and Expenses
3. IRS Topic no. 403, Interest received
4. TreasuryDirect: Treasury Bills
5. TreasuryDirect: Interest Income Reporting for Marketable Treasury Securities
6. IRS Instructions for Forms 1099-INT and 1099-OID
7. New York Tax Law § 612 (New York State Senate)
8. Vanguard, U.S. government obligations income information (tax year 2025)