The California, Connecticut and New York 50% rule for Treasury funds

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

In most states, the Treasury-interest part of a fund's dividend can be exempt from state income tax. California, Connecticut and New York add a gate: the fund must hold at least half its assets in qualifying government obligations at the close of every quarter of its taxable year. A fund that misses the test gets no exemption in those three states, even if much of its income came from Treasuries.

What each state's law says

California. Under Revenue and Taxation Code § 17145(a), a fund "is qualified to pay exempt-interest dividends to its shareholders if, at the close of each quarter of its taxable year, at least 50 percent of the value of its total assets consists of obligations which, when held by an individual, the interest therefrom is exempt from taxation by this state." A 2020 Franchise Tax Board bill analysis describing that law notes that federal and California obligations may be combined to meet the test.

New York. Tax Law § 612(c)(1) lets residents subtract fund dividends designated as U.S.-obligation interest "provided that, at the close of each quarter of the taxable year of such regulated investment company, at least fifty percent of the value of its total assets … consists of obligations of the United States and its possessions." The Tax Department's TSB-M-86(7)I adds that dividends from funds that don't meet the 50% requirement "remain fully taxable for New York State purposes."

Connecticut. General Statutes § 12-718 applies the same quarter-end test to obligations "with respect to which taxation by this state is prohibited by federal law." The implementing regulation says dividends from non-qualifying funds "are fully taxable for Connecticut purposes."

How the test works in practice

1. It's an asset test, not an income test. The share of income a fund earned from U.S. obligations and whether it passed the quarter-end asset test are separate facts. In 2025, VMFXX reported 66.61% of income from U.S. government obligations and, per Vanguard, met the test. SPAXX reported 50.90% and, per Fidelity, did not.
2. Every quarter counts. All three statutes require the 50% level "at the close of each quarter" of the fund's taxable year, so one quarter below the line is enough to fail for that year.
3. Passing doesn't make the whole dividend exempt. It unlocks the exemption only for the U.S.-obligation share. New York's guidance and Connecticut's regulation both compute the exempt part from the fund's income mix, and the rest stays taxable.
4. The fund's year may not be the calendar year. The statutes refer to the fund's taxable year, and the iShares supplement describes its test as applying "at the end of each quarter of the fiscal year." How a fiscal-year result lines up with your calendar-year dividends is a detail to confirm with the issuer or a tax professional.

Which funds met the test in 2025

Issuers flag this in their annual tax supplements. Vanguard marks funds that "meet the threshold requirements for California, Connecticut, and New York." iShares marks funds where "at least 50% of the assets of the fund were invested in Federal Obligations at the end of each quarter." Schwab says "only the funds denoted with an asterisk (*) meet the minimum investment requirements" of CA, CT and NY. Fidelity marks the opposite: funds that "did not meet the minimum investment in U.S. government securities required to exempt the distribution from tax in California, Connecticut, and New York." For Fidelity, "met" below is our inference from the absence of that mark. Here is what those 2025 documents say for the funds we track:

Met: SGOV, SHV, TFLO, VBIL, VUSXX, VMFXX, FDLXX, SNSXX. Did not meet: SPAXX, FZFXX, FDRXX, SNOXX. Not stated: BIL, BILS, TBIL, XBIL, CLIP. The State Street, F/m and Global X documents we used report income percentages but don't say whether the asset test was met. We don't guess, so on our CA, CT and NY pages those funds are treated as fully taxable and flagged. That's conservative: a fund that passed would do better than we show. If you hold one, ask the issuer. We couldn't retrieve WisdomTree's 2025 document for USFR, so its share is unknown.

What we don't know. We have verified only the 2025 tax-year documents. We haven't collected earlier years, so we can't tell you which funds met the test historically. A fund's status can change from year to year as its holdings change. Treat this table as a 2025 snapshot.

What the rule does to your yield

After state tax at each state's top rate, using current yields and 2025 shares (Illinois, which has no 50% rule, for contrast):

Live figures as of Oct 21, 2026, 5:25 PM CT; each yield carries its own source date. BIL’s issuer document doesn’t state the test result, so it is treated as fully taxable in CA, NY and CT.

The pattern is consistent. A fund that failed or didn't disclose the test drops sharply in the three states, while one that passed keeps most of its edge.

If you live in California, Connecticut or New York

• T-bills you hold directly aren't subject to this test. Their interest is exempt under federal law (31 U.S.C. § 3124), and New York's subtraction covers it directly.
• Check your fund's supplement each year for the asterisk or footnote. A fund that passed last year can fail this year.
• Our California, New York and Connecticut pages apply the rule automatically.

Sources

1. California Revenue and Taxation Code § 17145
2. California Franchise Tax Board, analysis of AB 3233 (2020): RIC exempt-interest dividends
3. New York Tax Law § 612 (New York State Senate)
4. NY Dept. of Taxation, TSB-M-86(7)I: Taxation of Dividends Paid by Regulated Investment Companies
5. Connecticut General Statutes § 12-718, Exempt dividends (Justia)
6. Regs. Conn. State Agencies § 12-701(a)(20)-3 (Cornell LII)
7. 31 U.S.C. § 3124, Exemption from taxation (Cornell LII)
8. Vanguard, U.S. government obligations income information (tax year 2025)
9. iShares 2025 U.S. Government Source Income Information
10. Fidelity TY25 GSE Supplemental Letter
11. Schwab Funds 2025 Supplementary Tax Information
12. SPDR ETF 2025 Tax Summary - Secondary Layout (col. 11: % of Income From Federal Securities)
13. F/m Investments 2025 Tax Insert
14. Global X ETFs 2025 Year-End Tax Supplement (col. 21: Income from Direct Federal Obligations)