U.S. Government Interest

Interest income you received from U.S. bonds, bills, notes and other obligations is taxable by the federal government and generally exempt from Minnesota income tax.

You may be able to subtract the amount of interest earned on certain U.S. government obligations when filing your Minnesota income tax return. This includes U.S. bond interest income you may have received as a partner in a partnership, a shareholder in an S corporation, or a beneficiary of a trust.

To qualify for this subtraction, the obligation must be:

• A direct and primary obligation of the United States or be exempt from state taxation under federal law
• In writing, containing a binding promise by the United States to pay specified sums on specific dates, and specifically authorized by Congress
• Interest bearing, with the interest income included in your federal taxable income for the year you claim the subtraction

Special Situations That Qualify for the Subtraction

• If the interest was earned as a dividend from a mutual fund and some of the fund’s income is derived from interest on federal obligations, you can subtract a portion of the dividend interest. Multiply the amount of your ordinary dividends from your federal Form 1099-DIV by the percentage of qualifying federal interest income reported by your fund. To find the applicable percentages, see the statement your fund provided you.
• Original Issue Discount (OID) income from U.S. securities is exempt from Minnesota taxation and qualifies for the subtraction.
• Interest income from “zero coupon” bonds issued by the U.S. government (STRIPS) qualifies for the subtraction. Interest on “LIONS,” “CATS,” and “TIGRS” is also considered U.S. interest.

Special Situations That Do Not Qualify

• Interest on federal tax refunds does not qualify for the subtraction.
• Interest from “Repurchase Agreements” involving federal obligations does not qualify for the subtraction.
• Interest income from obligations of U.S. possessions that are not included in federal taxable income cannot be subtracted. U.S. possessions include:
  — American Samoa
  — Puerto Rico
  — Guam
  — Virgin Islands
• Gain on the sale of federal obligations or mutual funds containing federal obligations is not considered to be interest on U.S. obligations. It is taxed the same as any other gain on the sale of an asset.
• Minnesota taxes federally taxable distributions from pension plans, including IRAs and Keoghs which are partially or fully funded by U.S. obligations. The U.S. interest earned by the pension plan is not allowed as a subtraction.

These agencies generally issue obligations that are exempt from Minnesota income tax and for which a subtraction is allowed:

• Bank for Cooperatives
• Commodity Credit Corporation
• Farm Credit System Financial Assistance Corporation
• Federal Deposit Insurance Corporation
• Federal Farm Credit Administration
• Federal Home Loan Banks
• Federal Intermediate Credit Banks
• Federal Land Bank Associations
• Federal Land Banks
• Federal Savings and Loan Insurance Corporation
• Financing Corporation
• General Insurance Fund of the Department of Housing and Urban Development, including:
  • Armed Services Housing
  • National Defense Housing Insurance
  • Neighborhood Conservation Housing Insurance
  • Production Credit Associations
  • Rental Housing Insurance
  • Rental Housing Project
  • Resolution Funding Corporations
  • Student Loan Marketing Association (Sallie Mae)
  • Tennessee Valley Authority
  • U.S. Postal Service
  • U.S. Treasury Department (notes, bonds, bills, savings bonds, freedom shares, certificates of indebtedness, or TIPS)
  • War Housing Insurance

  If you received interest from a government source not listed, contact the Minnesota Department of Revenue to determine its taxable status. Be sure to provide the exact names of the issuing agency and the obligation.

  If you deducted investment interest or other expenses on your federal return which were attributable to income not taxed by Minnesota, including interest earned from U.S. government obligations, you must add back those amounts to your taxable income.

  These agencies generally issue obligations that are taxable by Minnesota, and therefore do not qualify for the subtraction:

  • Asian Development Bank
  • College Construction Loan Insurance Association
  • District of Columbia Armory Board
  • Environmental Financing Authority
  • Export-Import Bank
  • Farmers Home Administration (FHA)
  • Federal Agricultural Mortgage Corporation
  • Federal Financing Bank
  • Federal Home Loan Mortgage Corporation (Freddie Mac)
  • Federal National Mortgage Association (FNMA) (Fannie Mae)
  • Federal Reserve Banks
  • Government National Mortgage Association (GNMA) (Ginnie Maes)
  • Inter-American Development Bank
  • International Bank for Reconstruction and Development (World Bank)
  • International Monetary Fund (IMF)
  • Maritime Administration Merchant Marine
  • National Consumer Cooperative Bank
  • New community development corporations
  • Small Business Administration
  • Small Business Investment Companies

  If you received interest from a government source not listed, you may call us to determine its taxable status. When you call, be sure to have the exact names of the issuing agency and the obligation.