US Treasury Bills Are Exempt From State Income Tax

Yes, interest earned on US Treasury bills is exempt from state income tax in all 50 states. This exemption is federal law, not a state-by-state choice. When you receive interest payments from Treasury bills, you do not report that income to your state tax authority, even if your state has an income tax.

The exemption applies only to the interest you earn. If you sell a Treasury bill before maturity for a profit, that capital gain is still subject to state income tax. The principal amount you invested is never taxed as income—it is straightforward your money returned to you.

This exemption exists because Treasury securities are issued by the federal government, and federal law (31 U.S.C. § 3124) prohibits states from taxing the interest income they generate. It is one of the few investment income types with this blanket protection across all states.

Key Takeaways

  • Interest from US Treasury bills is exempt from state income tax in every state, regardless of whether your state has an income tax.
  • The exemption covers only the interest earned, not capital gains if you sell the bill before it matures.
  • Federal law, not state law, creates this exemption—states cannot tax Treasury interest even if they wanted to.
  • You still owe federal income tax on Treasury bill interest, and some states tax capital gains from early sales.

What Counts as Interest vs. Capital Gains on Treasury Bills

Treasury bills are sold at a discount to their face value. When the bill matures, you receive the full face value. The difference between what you paid and what you receive at maturity is the interest, and that amount is exempt from state tax.

If you sell the Treasury bill before maturity, you may have a capital gain or loss. This happens when the market price of the bill has moved since you bought it. Capital gains are taxable at the state level in most states. For example, if you bought a Treasury bill for $9,800, it rises in value to $9,900, and you sell it, that $100 gain is subject to state income tax even though the underlying Treasury security is exempt.

The key distinction: the interest portion of your return is always state-tax-free. Any profit from selling before maturity is not.

Federal Income Tax Still Applies to Treasury Bill Interest

While states cannot tax Treasury bill interest, the federal government can and does. You must report all interest earned on Treasury bills on your federal tax return (Form 1040). The interest is taxed as ordinary income at your federal tax rate.

The IRS sends you a Form 1099-INT each January reporting the interest you earned in the previous year. You use this form to complete your federal return. There is no federal exemption for Treasury interest—only a state exemption.

If you hold Treasury bills in a tax-advantaged account like a traditional IRA or 401(k), the interest grows tax-deferred at both the federal and state level. You pay taxes only when you withdraw the money from the account.

How to Report Treasury Bill Interest on Your State Return

Most state tax forms have a line or section for interest income that is exempt from state tax. You do not leave it blank or ignore it. Instead, you report the amount you earned and then subtract it as an exemption, showing the state that you received it but are not paying tax on it.

Some states ask you to list the source of the exempt interest. Others straightforward have a checkbox for "US Treasury interest" or "federal obligations." Check your state's tax form instructions or contact your state tax authority to see exactly where to report it.

If you use tax software, most programs have a field for exempt interest income. Entering it there ensures your return is complete and accurate, even though the amount reduces your taxable income to zero for that line item.

States That Have No Income Tax

If you live in a state with no income tax—Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington, or Wyoming—the exemption does not matter to you because you pay no state income tax on any interest income. However, you still owe federal tax on the Treasury bill interest.

New Hampshire and Tennessee tax only dividend and interest income, not wages. In New Hampshire, Treasury bill interest is exempt from this tax. In Tennessee, the interest tax is being phased out and will be eliminated by 2026.

Treasury Bills vs. Other Treasury Securities

The state tax exemption applies to all US Treasury securities, not just bills. Treasury notes (issued for 2 to 10 years) and Treasury bonds (issued for 20 to 30 years) also have state-tax-exempt interest. Treasury Inflation-Protected Securities (TIPS) follow the same rule: the interest is exempt from state tax, but the inflation adjustment is taxable at the federal level.

Savings bonds (Series EE and I bonds) also have state-tax-exempt interest. However, the rules for when you report the interest differ—you can defer reporting until the bond matures or is redeemed, whereas Treasury bills and notes require you to report interest annually.

Municipal bonds, by contrast, are issued by states and cities and have different tax treatment. Their interest is usually exempt from federal tax and from the state tax of the state that issued them, but they are not Treasury securities.

Frequently Asked Questions

Do I have to report Treasury bill interest on my state return if it is exempt?

Yes, most states require you to report the amount even though it is exempt. Check your state's tax form to see where to list exempt interest. Reporting it shows the state you received it and are claiming the exemption correctly.

If I sell a Treasury bill before maturity and make a profit, is that profit taxed by my state?

Yes. The interest portion of your return is exempt from state tax, but capital gains from selling before maturity are taxable. Your state taxes the gain at its capital gains rate, which varies by state.

Are Treasury bills exempt from local taxes?

Federal law exempts Treasury interest from state tax. Some cities and counties also impose local income taxes, and the exemption generally applies to those as well, but rules vary by locality. Contact your local tax authority if you live in a city or county with a local income tax.

What if I bought Treasury bills through a brokerage—does the exemption still explore?

Yes. It does not matter whether you buy Treasury bills directly from the US Treasury or through a bank or brokerage. The interest is exempt from state tax either way. The exemption is tied to the security itself, not how you purchased it.

Can I deduct losses from selling Treasury bills on my state return?

Yes, if you sell a Treasury bill at a loss before maturity, you can deduct that loss against capital gains on your state return, subject to your state's rules on capital loss deductions. The loss treatment is the same as for any other security.