T-bill ETFs vs money market funds after state tax
T-bill ETFs and government money market funds both offer cash-like, government-backed yield, but states tax their payouts differently. The number that decides your after-tax yield isn't the headline rate. It's the share of the fund's income that came from U.S. government obligations, which each issuer publishes once a year.
Why fund payouts aren't automatically state-tax-free
If you own a Treasury bill yourself, its interest is exempt from state and local income tax under 31 U.S.C. § 3124. A fund is different. What you receive is a dividend from a regulated investment company, and each state decides whether the Treasury-interest part of that dividend passes through as exempt.
New York, for example, allows a subtraction only for the portion of a fund's distributions attributable to interest on U.S. obligations (Tax Law § 612(c)(1)). Its guidance explains that where less than 100% of a fund's income comes from federal obligations, only that percentage of the dividend qualifies (TSB-M-86(7)I). Connecticut's regulation works the same way, basing the exempt amount on "the portion of income received by the company that is derived from obligations which states are prohibited from taxing by federal law."
Issuers describe the general picture the same way. Schwab's 2025 supplement says "in most states, fund dividends derived from U.S. government obligations are generally exempt from state income taxes," and then warns shareholders in CA, CT and NY about extra requirements (Schwab 2025 document).
So two things decide the state tax on a fund: the fund's U.S. government obligations percentage for the year, and your state's rules, including whether it imposes the 50% asset test that California, Connecticut and New York use.
Why the exempt share differs from fund to fund
Funds that hold little besides Treasury bills, like most T-bill ETFs and "Treasury-only" money funds, report percentages near 100%. Government money funds can also hold repurchase agreements and securities of agencies such as Fannie Mae and Freddie Mac. Those are government-related, but their income is generally state-taxable. Vanguard's 2025 supplement says GNMA, FNMA, Freddie Mac and repurchase agreements, "including those that involve U.S. government obligations," are "generally subject to state and local taxes." The more of that a fund owns, the lower its exempt share.
Here are the 2025 percentages the issuers reported for every fund we track, with current yields and the result after state tax in a flat-tax state and in California:
| Fund | Type | Yield | 2025 exempt share | After IL tax (4.95%) | After CA top rate (13.3%) |
|---|---|---|---|---|---|
| SGOV | ETF | 3.75% | 95.14% | 3.74% | 3.73% |
| SHV | ETF | 3.85% | 89.80% | 3.83% | 3.80% |
| TFLO | ETF | 4.01% | 99.21% | 4.01% | 4.01% |
| BIL | ETF | 3.75% | 97.26% | 3.74% | 3.25% |
| BILS | ETF | 3.83% | 96.91% | 3.82% | 3.32% |
| VBIL | ETF | 3.77% | 100.00% | 3.77% | 3.77% |
| USFR | ETF | 3.98% | unknown | 3.78% | 3.45% |
| TBIL | ETF | 3.81% | 99.99% | 3.81% | 3.30% |
| XBIL | ETF | 4.00% | 99.98% | 4.00% | 3.47% |
| CLIP | ETF | 3.70% | 99.69% | 3.70% | 3.21% |
| VUSXX | Money fund | 3.91% | 100.00% | 3.91% | 3.91% |
| VMFXX | Money fund | 3.83% | 66.61% | 3.77% | 3.66% |
| SPAXX | Money fund | 3.52% | 50.90% | 3.43% | 3.05% |
| FDLXX | Money fund | 3.56% | 98.67% | 3.56% | 3.55% |
| FZFXX | Money fund | 3.54% | 61.52% | 3.47% | 3.07% |
| FDRXX | Money fund | 3.58% | 52.17% | 3.50% | 3.10% |
| SNSXX | Money fund | 3.62% | 99.99% | 3.62% | 3.62% |
| SNOXX | Money fund | 3.62% | 31.30% | 3.50% | 3.14% |
Live figures as of Oct 21, 2026, 5:25 PM CT; each yield carries its own source date. Exempt shares come from each issuer’s 2025 tax document (listed under Sources). The California column applies the 50% rule: funds whose issuer says they failed it, or doesn’t say, are treated as fully taxable there. USFR’s 2025 document couldn’t be retrieved, so its share is unknown and treated as fully taxable.
Reading the table
Same issuer, different tax result: VUSXX reported 100.00% for 2025 and VMFXX 66.61%. In Illinois (flat 4.95%) that leaves VUSXX at 3.91% and VMFXX at 3.77% after state tax; at California’s top rate the figures are 3.91% and 3.66%. At Fidelity, FDLXX reported 98.67% for 2025 and SPAXX 50.90%. In Illinois (flat 4.95%) that leaves FDLXX at 3.56% and SPAXX at 3.43% after state tax; at California’s top rate the figures are 3.55% and 3.05%. And at Schwab, SNSXX reported 99.99% for 2025 and SNOXX 31.30%. In Illinois (flat 4.95%) that leaves SNSXX at 3.62% and SNOXX at 3.50% after state tax; at California’s top rate the figures are 3.62% and 3.14%.
The gaps are small in a low-tax state and large in California, for two reasons. The state rate is higher, and SPAXX and SNOXX didn't pass the 50% test in 2025, according to their issuers, so none of their dividends are exempt there. VMFXX, by contrast, met the test, so its 66.61% share still counts in California.
Among T-bill ETFs the differences are mostly a few basis points, because nearly all of them hold Treasury bills. Even so, an ETF at 89.80% (SHV) or 95.14% (SGOV) is slightly less exempt than one at 99.99%.
Other differences that matter
- Different yield measures. Money funds quote a 7-day yield; ETFs quote a 30-day SEC yield. They cover different windows, so treat a few basis points of difference as noise.
- How you trade. Mutual funds, including money funds, are bought from and sold back to the fund at its next calculated net asset value, not traded between investors on an exchange (Investor.gov). ETFs trade on an exchange at market prices during the day.
- Neither is FDIC-insured. The FDIC lists mutual funds and Treasury securities among the products it does not insure, and Investor.gov notes mutual funds "are not guaranteed or insured by the FDIC or any other government agency."
- The share changes every year. We use 2025 figures because they are the latest published. The 2026 share will only be known after year-end and may differ.
Using the percentage at tax time
Each January or February, issuers post a "U.S. government obligations" or "government source income" supplement. If your state allows the pass-through, multiply the fund's ordinary dividends on your 1099-DIV by that percentage to get the amount you may be able to subtract on your state return. In California, Connecticut and New York, the fund also has to have met the 50% test. Fidelity's 2025 letter walks through this calculation with a worked example. Your state return's instructions decide the exact line.
Frequently asked questions
Are money market fund dividends exempt from state tax?
Partly, in many states. Only the portion of the dividend that came from U.S. government obligations can be exempt, and California, Connecticut and New York allow it only if the fund met a 50% asset test at every quarter-end.
Why is a government money fund’s exempt share lower than a Treasury fund’s?
Government money funds can hold repurchase agreements and agency securities such as Fannie Mae and Freddie Mac debt, whose income is generally state-taxable. Treasury-only funds hold mostly Treasury obligations.
Is a T-bill ETF better than a Treasury money fund after state tax?
Both usually report exempt shares near 100%, so the after-tax order mostly follows their current yields. Compare them on your state’s page, which applies each fund’s 2025 share.
Where do I find my fund’s exempt percentage?
In the issuer’s annual U.S. government obligations or government source income supplement, usually posted in January or February.
Sources
- 31 U.S.C. § 3124, Exemption from taxation (Cornell LII)
- New York Tax Law § 612 (New York State Senate)
- NY Dept. of Taxation, TSB-M-86(7)I: Taxation of Dividends Paid by Regulated Investment Companies
- Regs. Conn. State Agencies § 12-701(a)(20)-3 (Cornell LII)
- Investor.gov (SEC): Mutual Funds
- FDIC: Understanding Deposit Insurance
- Vanguard, U.S. government obligations income information (tax year 2025)
- iShares 2025 U.S. Government Source Income Information
- Fidelity TY25 GSE Supplemental Letter
- Schwab Funds 2025 Supplementary Tax Information
- SPDR ETF 2025 Tax Summary - Secondary Layout (col. 11: % of Income From Federal Securities)
- F/m Investments 2025 Tax Insert
- Global X ETFs 2025 Year-End Tax Supplement (col. 21: Income from Direct Federal Obligations)