Fact Check: Is FZFXX state tax exempt?

Is FZFXX State Tax Exempt?

The claim regarding the state tax exemption status of the Fidelity Treasury Money Market Fund (FZFXX) raises important questions for investors seeking to understand the tax implications of their investments. Specifically, the inquiry focuses on whether the income generated from FZFXX is exempt from state taxes, which can significantly affect net returns for investors in various states.

What We Know

1. FZFXX Overview: FZFXX is a money market fund that primarily invests in U.S. Treasury securities. The income from these securities is generally exempt from state taxes, but this exemption can vary based on specific fund characteristics and state regulations 15.

2. State Tax Exemption Details: According to Fidelity's documentation, a portion of the income generated from FZFXX may be exempt from state income tax, but this is not universally applicable. For instance, the fund did not meet the minimum investment threshold in U.S. government securities required for full exemption in states like California, Connecticut, and New York 24.

3. Percentage of Exemption: Fidelity's tax-exempt income reports indicate that while FZFXX may provide some level of state tax exemption, it does not guarantee full exemption across all states. For example, in 2022, FZFXX had a reported state tax-exempt income percentage, but specific figures can vary year by year and by state 147.

4. Comparison with Other Funds: Other Fidelity funds, such as FDLXX, have been noted to have higher percentages of state tax exemption, which suggests that investors looking for tax efficiency might consider alternatives depending on their state of residence 28.

Analysis

Source Evaluation

• Fidelity Investments: The primary source of information regarding FZFXX's tax status comes from Fidelity itself, which provides official documentation and tax reporting guidelines. Fidelity is a reputable financial services company, but it is essential to note that its materials may have a promotional bias, as they aim to encourage investment in their funds 17.

• Personal Finance Blogs: Articles from personal finance blogs, such as My Money Blog and The Finance Buff, offer insights based on user experiences and comparisons of different funds. While these sources can provide practical perspectives, they may lack rigorous financial analysis and could be influenced by personal biases or anecdotal evidence 24.

• Investment Forums: Discussions on platforms like Bogleheads provide community-driven insights but should be approached with caution. The information shared may not be verified, and individual interpretations of tax implications can vary widely 3.

Methodology and Evidence

The methodology used by Fidelity to determine the state tax exemption status involves calculating the percentage of income derived from U.S. government securities. However, the specific criteria for what constitutes "sufficient" investment in these securities can vary by state, leading to potential discrepancies in reported exemption rates 16.

Additionally, the lack of detailed state-specific breakdowns in some sources makes it challenging to ascertain the precise tax implications for investors in different jurisdictions. More granular data on how FZFXX's income is treated in specific states would enhance clarity.

Conclusion

Verdict: Partially True

The claim that FZFXX is state tax exempt is partially true. Evidence indicates that while income from the Fidelity Treasury Money Market Fund may be exempt from state taxes, this exemption is not universally applicable and can vary significantly depending on the investor's state of residence and the specific characteristics of the fund. Fidelity's documentation supports the notion that a portion of the income may qualify for exemption, but it also highlights that certain states impose restrictions that prevent full exemption.

It is important to note that the percentage of income exempt from state taxes can fluctuate annually and is influenced by the fund's investment in U.S. Treasury securities, which may not meet the thresholds required for full exemption in some states. This variability introduces uncertainty regarding the tax implications for individual investors.

Readers should be aware of these nuances and limitations in the available evidence. The information provided by Fidelity, while authoritative, may carry a promotional bias, and insights from personal finance blogs and forums may lack rigorous verification. Therefore, it is advisable for investors to critically evaluate their own circumstances and consult with tax professionals to understand the specific implications of investing in FZFXX in their respective states.

Sources

1. Fidelity Investments. "2024 Tax-Exempt Income from Fidelity Funds." Fidelity PDF
2. My Money Blog. "Fidelity Money Market Funds: Claim Your State Income Tax Exemption." My Money Blog
3. Bogleheads Forum. "Fidelity treasury money market (FZFXX) subject to state tax?" Bogleheads
4. The Finance Buff. "Which Fidelity Money Market Fund Is the Best at Your Tax Rates." The Finance Buff
5. JustAnswer. "A person invests in FZFXX from fidelity." JustAnswer
6. Fidelity Investments. "Fidelity® Tax-Exempt Money Market Fidelity® Treasury Money Market Fund." Fidelity Prospectus
7. Fidelity Investments. "Fidelity Mutual Fund Tax Information." Fidelity Tax Information
8. The Finance Buff. "Claim State Tax Free Interest in TurboTax, H&R Block, FreeTaxUSA." The Finance Buff