Treasury and I bond interest: the state tax exemption
Treasury bills, notes, bonds and I bonds pay interest that no state or city can tax. Bank, CD and credit union interest gets no such break. In a high-tax state that difference can outweigh a small rate gap.
General information, not tax advice. This guide explains how federal and state rules generally work. Your situation may differ; check the official source linked below or ask a tax professional before acting.
How the exemption works
Federal law (31 U.S.C. 3124) bars states and localities from taxing interest on obligations of the United States. That covers Treasury bills, notes, bonds, TIPS and Series EE and I savings bonds. You still pay federal income tax on that interest; it appears in box 3 of Form 1099-INT, and your state return subtracts it.
Interest from banks and credit unions, including CDs, high-yield savings, money market deposit accounts and checking, is not a U.S. obligation, so states that tax interest income tax it in full. Brokered CDs are bank deposits too, so their interest is state-taxable even though you buy them in a brokerage account.
Why it matters: the after-tax comparison
Suppose a 1-year CD pays a little more than a 52-week T-bill. If your state taxes interest, the CD's yield after state tax can end up below the T-bill's. The break-even is roughly: CD yield × (1 − state tax rate) = T-bill yield (if you itemize and deduct state taxes federally, the effect is somewhat smaller). In a state with no income tax, compare the stated yields directly.
Our sister site YourBestSavings has a tax-equivalent yield calculator, today's T-bill rates, a T-bills vs CDs comparison and current I bond rates.
State-by-state: how interest is treated
The table shows the general approach in each state for individual residents. Rates, local income taxes (for example in some cities and counties) and fund rules vary; check your state's return instructions.
| State | Bank, CD and savings interest | Treasury and I bond interest |
|---|---|---|
| Alabama | Taxed as income | Exempt (subtract on state return) |
| Alaska | No state income tax on interest | Not taxed |
| Arizona | Taxed as income | Exempt (subtract on state return) |
| Arkansas | Taxed as income | Exempt (subtract on state return) |
| California | Taxed as income | Exempt (subtract on state return) |
| Colorado | Taxed as income | Exempt (subtract on state return) |
| Connecticut | Taxed as income | Exempt (subtract on state return) |
| Delaware | Taxed as income | Exempt (subtract on state return) |
| District of Columbia | Taxed as income | Exempt (subtract on state return) |
| Florida | No state income tax on interest | Not taxed |
| Georgia | Taxed as income | Exempt (subtract on state return) |
| Hawaii | Taxed as income | Exempt (subtract on state return) |
| Idaho | Taxed as income | Exempt (subtract on state return) |
| Illinois | Taxed as income | Exempt (subtract on state return) |
| Indiana | Taxed as income | Exempt (subtract on state return) |
| Iowa | Taxed as income | Exempt (subtract on state return) |
| Kansas | Taxed as income | Exempt (subtract on state return) |
| Kentucky | Taxed as income | Exempt (subtract on state return) |
| Louisiana | Taxed as income | Exempt (subtract on state return) |
| Maine | Taxed as income | Exempt (subtract on state return) |
| Maryland | Taxed as income | Exempt (subtract on state return) |
| Massachusetts | Taxed as income | Exempt (subtract on state return) |
| Michigan | Taxed as income | Exempt (subtract on state return) |
| Minnesota | Taxed as income | Exempt (subtract on state return) |
| Mississippi | Taxed as income | Exempt (subtract on state return) |
| Missouri | Taxed as income | Exempt (subtract on state return) |
| Montana | Taxed as income | Exempt (subtract on state return) |
| Nebraska | Taxed as income | Exempt (subtract on state return) |
| Nevada | No state income tax on interest | Not taxed |
| New Hampshire | No state income tax on interest | Not taxed |
| New Jersey | Taxed as income | Exempt (subtract on state return) |
| New Mexico | Taxed as income | Exempt (subtract on state return) |
| New York | Taxed as income | Exempt (subtract on state return) |
| North Carolina | Taxed as income | Exempt (subtract on state return) |
| North Dakota | Taxed as income | Exempt (subtract on state return) |
| Ohio | Taxed as income | Exempt (subtract on state return) |
| Oklahoma | Taxed as income | Exempt (subtract on state return) |
| Oregon | Taxed as income | Exempt (subtract on state return) |
| Pennsylvania | Taxed as income | Exempt (subtract on state return) |
| Rhode Island | Taxed as income | Exempt (subtract on state return) |
| South Carolina | Taxed as income | Exempt (subtract on state return) |
| South Dakota | No state income tax on interest | Not taxed |
| Tennessee | No state income tax on interest | Not taxed |
| Texas | No state income tax on interest | Not taxed |
| Utah | Taxed as income | Exempt (subtract on state return) |
| Vermont | Taxed as income | Exempt (subtract on state return) |
| Virginia | Taxed as income | Exempt (subtract on state return) |
| Washington | No state income tax on interest | Not taxed |
| West Virginia | Taxed as income | Exempt (subtract on state return) |
| Wisconsin | Taxed as income | Exempt (subtract on state return) |
| Wyoming | No state income tax on interest | Not taxed |
New Hampshire's former tax on interest and dividends was repealed for tax years beginning after December 31, 2024, and Tennessee's Hall income tax ended after 2020. Washington taxes certain capital gains but not interest.
Treasury funds and ETFs
A Treasury money market fund or Treasury ETF pays dividends, not interest, but most states still let you exclude the part that came from Treasury interest. Each fund publishes a "U.S. government obligations" percentage after year-end. California, Connecticut and New York allow the exclusion only if the fund met a 50% threshold; most other states allow the pro-rata share. Government money market funds that hold mainly repurchase agreements or agency debt may produce little exempt income.
I bonds and EE bonds
Savings bond interest is exempt from state and local tax like other Treasuries. Federally you can defer it until you redeem the bond (or 30 years pass), and it may be excluded entirely when used for qualified higher education expenses. TreasuryDirect issues the 1099-INT in the year you cash the bond. More on how interest is reported in our guide to how savings interest is taxed.
Frequently asked questions
Is T-bill interest exempt from state income tax?
Yes. Interest on Treasury bills, notes and bonds, TIPS, and Series EE and I savings bonds is exempt from state and local income taxes under federal law (31 U.S.C. 3124). It is still subject to federal income tax.
Is CD or high-yield savings interest exempt from state tax?
No. Interest from bank and credit union accounts, including CDs, savings and money market accounts, is taxable in every state that taxes interest income.
Which states do not tax interest at all?
9 states have no income tax on interest: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, Wyoming. In those states the Treasury exemption makes no difference.
Is a Treasury money market fund state-tax-free?
Partly, depending on the fund and your state. Most states let you subtract the share of a fund’s dividends that came from U.S. government obligations; the fund publishes that percentage each year. A few states, including California, Connecticut and New York, allow it only if the fund held at least 50% of its assets in U.S. government obligations. Interest from repurchase agreements and from agency securities that are not exempt usually does not qualify.
How is I bond interest taxed federally?
You can report I bond interest each year or defer it until you cash the bond or it stops earning interest after 30 years. Most people defer. The interest may be tax-free federally if used for qualified higher education expenses and you meet the income limits (Form 8815).
Where does Treasury interest appear on my 1099-INT?
In box 3, "Interest on U.S. Savings Bonds and Treasury obligations." T-bill interest (the discount) is reported in the year the bill matures. Your state return then subtracts that amount.
Official sources
- 31 U.S.C. § 3124 (exemption of U.S. obligations from state and local tax)
- IRS Publication 550, Investment Income and Expenses
- TreasuryDirect: Tax information for EE and I bonds
- TreasuryDirect: Treasury Bills
Related guides
- How savings and CD interest is taxed — Form 1099-INT, when interest counts as income, accrued interest on multi-year CDs, and the early-withdrawal penalty deduction.
- HSA tax rules — Contribution limits, the triple tax advantage, Form 8889, and the states (California and New Jersey) that tax HSAs.
- 529 plan tax rules — Tax-free withdrawals, Form 1099-Q, K-12 and credential expenses, Roth IRA rollovers, and state deductions.
- Bank bonuses and card rewards: what is taxable — Bank account bonuses (1099-INT or 1099-MISC) versus credit card rewards earned by spending (treated as rebates).
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